Restaurant service providers under GST notification 11/2017-CT cannot claim ITC on general expenses unless providing other eligible supplies

The AAR Gujarat ruled that a restaurant service provider operating under GST notification 11/2017-CT (Rate) at 5% tax rate is generally not entitled to claim ITC on general business expenses when providing only restaurant services. However, if the applicant provides other ITC-eligible supplies, credit may be available under explanation (iv)(b) of the notification, subject to restrictions under section 17(2) of CGST Act. The determination and reversal of ITC for inputs/input services and capital goods would be governed by Rules 42 and 43 of CGST Rules respectively. The applicant's argument that section 17 CGST Act is inapplicable was rejected as it ignored the notification's explanation (iv) provisions.

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Issues Involved:
1. Entitlement to claim input tax credit (ITC) for general expenses.
2. Entitlement to ITC based on square foot and area of usage.
3. Applicability of Rule 42/43 of the CGST Rules, read with SGST Rules, to the claim of ITC.

Summary:

Issue 1: Entitlement to Claim ITC for General Expenses
The applicant sought to claim ITC for general expenses incurred for the business. The applicant provides restaurant services and discharges GST at 5% under Notification No. 11/2017-CT (Rate) as amended by Notification No. 20/2019-CT (Rate). The notification specifies that the benefit is available only if ITC on goods and services used in supplying the service has not been taken. Since the applicant provides restaurant services at premises other than specified premises, they are eligible for the notification's benefit, subject to not claiming ITC. Therefore, the applicant is not eligible to claim ITC for expenses incurred in respect of restaurant services. If the applicant provides other supplies eligible for ITC, the credit would be eligible subject to the conditions in explanation (iv) of the notification and section 17(2) of the CGST Act, 2017.

Issue 2: Entitlement to ITC Based on Square Foot and Area of Usage
The applicant inquired whether they could enjoy the benefit of ITC based on the square foot and area of usage of the premises. The ruling states that if the applicant provides other supplies eligible for ITC, the credit would be eligible subject to the conditions in explanation (iv) (b) of the notification. The determination of ITC and its reversal would be governed by Rule 42 of the CGST Rules, 2017 for inputs and input services, and Rule 43 for capital goods.

Issue 3: Applicability of Rule 42/43 of the CGST Rules, Read with SGST Rules
The applicant questioned the applicability of Rule 42/43 of the CGST Rules, read with SGST Rules, given that the declared tariff of the hotel rooms never exceeds Rs. 7,499/-. The ruling clarifies that Rule 42/43 of the CGST Rules, read with SGST Rules, are applicable to the claim of ITC by the applicant.

Conclusion:
The applicant is not entitled to claim ITC for general expenses related to restaurant services. ITC based on square foot and area of usage is subject to the conditions in the notification and section 17(2) of the CGST Act, 2017. Rule 42/43 of the CGST Rules, read with SGST Rules, are applicable to the claim of ITC. The ruling emphasizes strict interpretation of exemption notifications, aligning with the Supreme Court's judgment in the case of Dilip Kumar & Company.

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