SERVICES OF SHORT-TERM ACCOMMODATION

Service tax has been introduced on services provided by hotels and other similar establishments providing short-term accommodation for less than three months’ time with effect from 1-5-2011. Amidst the controversy, as discussed in August, 2011 issue of BCAJ, as to whether food served in a restaurant is an indivisible contract where dominant objective is sale of food or a composite contract of sale of food and providing services of ambience of airconditioning, furniture, etc. and other personalised services, Service tax has been introduced on the service provided by restaurants and so also the service provided by hotels, club, inns, etc. for providing short-term accommodation. Renting of immovable property is already taxed since 1-6-2007. However, the scope of the said service does not include residential accommodation, whereas short-term accommodation which is already subject to luxury tax by the States is brought in the net of Service tax. Implications of the new levy vis-à-vis renting of immovable property and Luxury tax imposed by States are discussed separately.

Statutory provisions contained in the Finance Act, 1994 (Act)

Section 65(105)(zzzzw) of the Act:

‘Taxable service’ means ‘any service provided or to be provided to any person by a hotel, inn, guest house, club or campsite, by whatever name called for providing of accommodation for a continuous period of less than three months.’

•  The subject-matter of this service is provision of accommodation. The term ‘accommodation’ is not defined in the Act. However, applying the principle of ‘ejusdem generis’ it can be observed that all the terms used viz. inn, guest house, club or campsite along with the term ‘hotel’ in generic terms indicate lodging facility or stay.

•  The period of stay should not continuously be more than three months. Thus the stay could vary from one day to 89 days (assuming 30 days in a month).

•  The accommodation can be provided to any person and service must relate to accommodation of persons.

•  The declared tariff of such accommodation should be Rs.1,000 or more per day. CBEC’s Circular DOF No. 334/3/2011-TRU, dated 28-2-2011 clarifies as under:

“Actual levy will be restricted to accommodation with declared tariff of Rs.1,000 per day or higher by an exemption Notification. Once this requirement is met, tax will be chargeable irrespective of the fact that actually the amount charged from a particular customer is less than Rs.1,000 The tax will also be charged on the gross amount paid or payable for the value of the service.”

Further to the above, the following clarification was issued vide Circular DOF 334/3/2011-ST, dated 25-4-2011:

“3. In accordance with the budget announcement, the levy will be applicable on short-term accommodation with a declared tariff of Rs. 1000 per day or above. A suitable exemption has been given below this amount vide Notification No. 31/2011-ST, dated 25th April, 2011. Declared tariff has been defined within the Notification as charges for all amenities provided in the unit of accommodation. Thus it will include cost of all electronic gadgets installed in the room and any other facility normally provided by a hotel as part of the stay. Cost of extra bed will not form a part of the declared tariff. No further exclusions are provided from the declared tariff e.g., on account of breakfast or any other meal whose cost is included in the declared tariff including any discount given to the customer.”

The explanation in Notification No. 31/2011-ST of 25-4-2011 defines ‘declared tariff’ as under:

•  The relevance of ‘declared tariff’ is in determining the liability to pay Service tax as far as shortterm accommodation is concerned. However, the actual amount charged e.g., if declared tariff is Rs.1,100 but actual room rent charged is Rs.800, tax would be paid @5% on Rs.800.

•   It is possible to levy separate tariff for the same accommodation in respect of a class of customers which can be recognised as distinct class on an intelligible criterion. However, it would apply to the class of customers and not a single or a few corporate entities only. For instance, there could be corporate customers or privileged customers and walk-in customers, special tariffs can be offered to corporate and/or privileged customers.

•  When the declared tariff is revised as per the tourist season, the liability of Service tax would be on the declared tariff where the published/ printed tariff is above Rs.1,000. However, the revision should be uniformly applicable to all customers and such off-season rate charges should be declared.

Valuation aspects

•  Luxury tax is imposed by the States on the accommodations provided by hotels and similar establishments. The value of service in this case would be the gross amount charged for the service. Through CBEC Circular No. 139, dated 10-5-2011, it has been clarified that the luxury tax is not to be included in the taxable value for determining Service tax liability.

•  Further, the said Circular No. 139, dated 10-5-2011 has also clarified that where the declared tariff includes the cost of food or beverages, Service tax would be charged on the total value of declared tariff. This is evident in the definition of ‘declared tariff’ of the Notification cited above. However, if separate charge is recovered for food or beverages in the bill, such amount is not considered part of declared tariff.

•  Similarly, DOF letter No. 334/3/2011-TRU, dated 25-4-2011 has clarified that amount charged towards extra bed will not be included in the value of declared tariff.

•  In terms of Notification No. 34/2011-Service tax dated 25-4-2011, Notification No. 1/2006-ST of 1-3-2000 is amended to provide abatement of 50% on the short-term accommodation service and accordingly effective rate of Service tax for this service is 5% of the gross value of service. This is subject to the conditions that no CENVAT credit of excise duty on inputs, capital goods or Service tax on input service is taken or that the benefit of Notification No. 12/2003 has not been availed.

•     Section 65(105)(zzzz) of the Act

Taxable service means any service provided or to be provided to any person, by any person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for the furtherance of business or commerce.

Explanation 1 — For the purpose of this sub- Clause, ‘immovable property’ includes —

………….

But does not include —

………….

(d)    buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

It is interesting to note that short-term accommodation service has been introduced w.e.f. 1 -5-2011, without effecting any amendment in the exclusion clause stated above which is existing w.e.f. 1-6-2007. This is likely to result in number of issues as to services classification and applicability of short-term accommodation Service.

In this regard, attention is drawn to an important Delhi-CESTAT ruling in Dr. Lal Path Lab Pvt. Ltd. v. CCE , (2006) 4 STR 527, wherein it has been held that if a service is specifically excluded from a Service category it cannot be taxed under another category. In this case, services of blood sample collection which was specifically excluded under ‘Technical testing & analysis service’ was sought to be taxed under ‘Business auxiliary service’. The principle laid down in the ruling is very important for determination of Services Classification and the same has been followed in a large number of subsequently decided cases.

Issues could arise as to, whether the scope of short-term accommodation service, is restricted only to non-commercial accommodation services. The definition reproduced above is not indicative of the same.

In view of the foregoing, whether hotels falling within the scope of short-term accommodation service can contend that the correct services classification for accommodation services provided by them is renting of immovable property wherein the service is specifically excluded and hence there can be no liability to Service tax under the newly introduced category is matter for a larger professional debate.

Luxury tax vis-à-vis Short-term accommodation service

The relevant extracts from the Maharashtra Tax on Luxuries Act, 1987 (MLTA) are as under:

Section 2

(b)    ‘business’ includes
(i)    The activity of providing residential accommodation and any other service in connection with or incidental or ancillary to, such activity of providing residential accommodation, by a hotelier for monetary consideration

……..

(e)    ‘hotel’ includes
(i)    a residential accommodation, a club, a lodg-ing house, an inn, a public house or a building or part of a building, where a residential ac-commodation is provided by way of business; and

……..

(f)    ‘hotelier’ means the owner of the hotel and includes the person who for the time being is in charge of the management of the hotel:

(g)    ‘Luxury provided in a hotel’ means —
(i)    accommodation and other services provided in a hotel, the rate or charges for which including the charges for air -conditioning, telephone, television, radio, music, entertainment, extra beds and the like, exceeds rupees two hundred or more per residential accommodation per day; and

……..

The following needs to be noted:

•     The charge under MLTA is on the hotelier and tax is to be computed as a percent of turnover of receipts. The rate of tax varies vis-à-vis charge per day/per residential accommodation.

•     In order to be liable to luxury tax, accommodation need to be provided by way of business.

•     The scope includes providing of facilities/amenities relating and incidental to accommodation

•     In order to be liable to luxury tax, accommodation services need to be provided for a monetary consideration.

It would appear that there is a very clear over-lap of Service tax on short-term accommodation vis-à-vis Luxury tax under MLTA. On lines with some other services like intellectual property rights, franchise, etc. this levy is also likely to be challenged in Courts on the ground of dual taxation. In this regard, the exclusion under renting of immovable property discussed above assumes increased significance inasmuch as the same was possibly done taking into account the fact that Luxury tax is being imposed on hotel accommodation by the States.

Some issues
(i)    A small hotel in Bhavnagar has a tariff card for single occupancy for a small room is Rs.950. The hotel also provided airport pick-up facility to its customer for a charge of Rs.100. Would the transaction be liable for Service tax?

Ans. (i) The additional facility of pick-up from airport is charged separately. Therefore the declared tariff would not cover the additional service charge and it being less than Rs.1,000 would not attract Service tax.

(ii)    A hotel has declared tariff of Rs.1,200 for a class of rooms in regular season. However, during off-season of monsoon for four months, the tariff is declared @ Rs.900. In terms of the instructions provided in the Government Circulars above, although Service tax is payable when tariff is Rs.1,200, whether no Service tax is payable during off-season?

Ans. (ii) Yes. If the declared tariff is less than Rs.1,000, no Service tax is payable in terms of the Board’s Circular.

(iii)    A company X is constructing a factory premises and erecting a plant near a small village in a district in Maharashtra. Since there is ongoing construction/erection, the company X has made a special arrangement with a small hotel in the village and booked two rooms in the said hotel for a continuous period of six months at tariff of Rs.1,500 per room for its regularly visiting engineers, executives, etc. Whether Service tax is attracted on this transaction?

Ans. (iii) If the same room is in occupation continuously for three months or more, Service tax would not be attracted as the short-term accommodation is defined as a period of less than three months. However, if the hotel has promised any two rooms as and when required and a specific room is occupied for less than a period of three months, it appears that Service tax would be attracted.

(iv)    A retired executive from a MNC owns several flats in Mumbai. In order to generate revenue some flats are rented out to corporates under contracts for use by their visiting guests. The said flats have usual accommodation facilities. Such contracts could be monthly/quarterly/ yearly depending upon the requirement of a corporate. The charge of accommodation under the contract is periodic (Monthly/Quarterly/ Yearly) irrespective of the actual occupation. In all cases, per day/per room charge would work out in excess of exceed Rs.1000/per room/per day. Would the provision of short-term accommodation service be applicable to the retired executive?

Ans. (iv) It would appear that residential accommodation services provided in the given case are contractual (for a flat for a specified period), as distinct from accommodation services provided by hotels and similar establishments which essentially provide accommodation to walk-in-customers for a declared tariff which is usually displayed. Such establishments also do enter into period contracts with companies. Considering the scope of short-term accommodation services as discussed in Para 3 earlier, it appears that the accommodation services provided by the retired executive would not get covered under short-term accommodation service.

(v)    All India Chartered Accountants Society (AICAS) is a reputed body of CAs and regularly holds conferences for the benefit of its members AICAS is planning to host a three day conference on ‘DTC & GST’ in a seven star hotel in Mumbai wherein expert faculty from abroad and India would be invited. As a good gesture, the said hotel has agreed to offer complimentary accommodation to the visiting faculties, subject to a condition that Service tax (if applicable) would have to be borne by AICAS. Whether complimentary accommodation provided to visiting faculty of AICAS by the hotel would attract Service tax.

Ans. (v) It appears to be reasonably established that complimentary accommodation to visiting faculty of AICAS has been offered, considering the fact the hosting of three day conference would result in substantial business for the hotel and promotion of its facilities to the delegates as well.

Considering the provisions of the following, in particular:

•     Section 67 of the Act,

•   Service tax (Determination of Value) Rules, 2006,

•     Point of Taxation Rules, 2011 and

•     Consequent amendments in Service tax Rules, 1994

it would reasonably appear that complimentary accommodation provided to the visiting faculty of AICAS by the seven star hotel may attract Service tax under short-term accommodation service.