itc on restaurant business

[VINAY AGRAWAL]

dear sir/madam

my client is engaged in the business of Hotel and restaurant business under same GSTN, for the restaurant business client has opted regular basis, client has charges 5% GST on the restaurant business and not taken any ITC as the same is not allowed, however client has utilized credit balance of ITC of hotel business with output liability on restaurant business, officials suggested that you should have pay tax on restaurant business on cash payment basis and availment of credit balance of ITC is not as per law, please suggest and also provide supporting.

Thanks

[Sadanand Bulbule]

The suggestion of the officer is perfectly right as your client having opted to pay 5% GST [without ITC] on restaurant services is barred from utilising any ITC, be it accrued from your own hotel segment or other sources. Your client has to pay tax in cash which stands collected in the tax invoice. Customers have paid the tax and your client's duty is to pay it on time.

Law does not authorise taxpayers to become rich by way of unjust enrichment.

[YAGAY andSUN]

In continuation to the above revert, please also consider following reply to understand the whole gamut in better way:-

You're absolutely right to seek clarity here — this is a very common issue when a taxpayer is involved in both hotel (eligible for ITC) and restaurant (5% GST without ITC) businesses under the same GST registration.

Let’s break it down in clear legal and practical terms — and I’ll provide authoritative backing.

🏨🍽️ Scenario Overview

Business Activity	GST Rate	ITC Eligibility
Hotel Services (Room Tariff > ₹1,000/day)	12% or 18%	✅ ITC allowed
Restaurant Services (standalone or within hotel)	5% (without ITC)	❌ ITC not allowed (as per Notification 11/2017 – Rate Notification)

You’ve mentioned the client charges 5% GST on restaurant sales, which means they are under Composition-equivalent rate under the regular scheme — and thus, ITC is not admissible on restaurant outward tax liability.

🚫 What Went Wrong?

Your client used ITC from hotel services to offset GST liability on restaurant services — but as per law:

🔴 ITC cannot be used to pay output tax on restaurant supplies charged at 5% (without ITC).

This is a clear violation of the Rate Notification and ITC restrictions.

📜 Legal Backing

🔹 1. Rate Notification:

Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017

[Entry No. 7(i)] – Supplies by way of restaurant services attract 5% GST without ITC

🔹 Condition Clearly Mentioned:

"Provided that credit of input tax charged on goods and services used in supplying the service has not been taken"

Thus, ITC shall not be availed on restaurant services charged at 5%.

🔹 2. Circular No. 164/20/2021-GST dated 06.10.2021

Clarifies:

"...in cases where the restaurant is located inside a hotel and charges 5% GST without ITC, they cannot use common ITC from hotel business to pay restaurant tax liability."

🔹 3. Section 17(2) & Rule 42 of CGST Rules

When a taxpayer makes both:

• Taxable supplies with ITC eligibility (hotel)
• Exempt or restricted ITC supplies (restaurant at 5%)

Then:

Input tax credit must be reversed proportionally under Rule 42, or segregated and not used against ineligible supplies.

Hence, using hotel ITC against restaurant liability violates this segregation.

✅ What Should Your Client Do Now?

1. Stop utilizing hotel ITC against restaurant output tax liability.
2. Pay GST on restaurant sales via cash (i.e., electronic cash ledger).
3. Recalculate past periods — determine the wrongly adjusted ITC and consider voluntary payment via DRC-03 to avoid penalties.
4. Maintain clear accounting segregation of ITC:
   • Separate books or costing codes for hotel vs. restaurant.

🧾 Supporting Format for DRC-03 (if needed)

Under Section 73(5) – Voluntary payment of tax before notice

Field	Value
Tax Period	[e.g., Apr–Sep 2023]
Reason	ITC wrongly utilized for restricted supply
Amount	₹ [Calculated Value]
Payment Type	Voluntary
Remarks	Reversal of wrongly availed ITC on restaurant business taxed at 5% (non-eligible for ITC)

✅ DRC-03 Template (You can fill this in manually)

Reason for Payment: Voluntary payment under Section 73(5) – Wrongful utilization of ITC

Cause: ITC from hotel business wrongly used to offset output liability on restaurant business (charged @5% without ITC eligibility)

Period: Apr 2023 to Sep 2023

Amount: ₹66,500 (from calculation above)

Tax Type: CGST + SGST (split 50/50) OR IGST (based on state of registration)

📝 Summary Table

Issue	Correct Position
ITC from hotel used for restaurant	❌ Not allowed under GST law
Restaurant GST @5% without ITC	✅ Correct if charged without availing ITC
Must pay tax via	💸 Cash (Electronic Cash Ledger)
Legal Support	Notification 11/2017, Rule 42, Circular 164/2021
Rectification	Voluntary DRC-03 and proper segregation of credits in future