The Aurangabad Bench of the Bombay High Court (HC) has extended interim protection to a hospitality company in a key goods and services tax (GST) dispute challenging the basis for taxing restaurants located within high-tariff hotels at 18 per cent.
In its order dated March 24, the division Bench declined to vacate the earlier interim relief and instead stayed the operation of the show-cause notice issued under Section 74 of the Central GST Act, pending further consideration of the writ petition. The court also directed the tax authorities to file their reply, with the matter listed for further hearing in June.
The dispute arises from a demand exceeding ?4 crore, covering 2019-20 to 2024-25, where the department sought to proceed with adjudication before the statutory limitation deadline of March 31. The Union argued that continuing interim protection would frustrate the adjudication process and impact revenue collection.
However, the court observed that the petitioner had already complied with earlier directions by furnishing a bank guarantee of ?40 lakh and found it appropriate, at this stage, to maintain the status quo by staying the show-cause notice until further orders.
The underlying writ petition challenges the GST rate structure that taxes restaurant services at 18 per cent when located within hotels charging room tariffs above ?7,500 per night, compared with 5 per cent for standalone restaurants.
Appearing for the petitioner, Abhishek A Rastogi, founder of Rastogi Chambers, advanced a constitutional and structural challenge to this framework.
He argued that the rate mechanism artificially links the taxability of a restaurant service to an unrelated factor — the declared room tariff of the hotel — rather than the intrinsic nature of the supply. According to him, such classification lacks a rational nexus and results in excessive and unintended tax burdens.
Rastogi submitted that the current regime produces anomalous outcomes. Even a transient breach of the ?7,500 tariff threshold— for instance, due to seasonal pricing or dynamic rates — can result in the restaurant being subjected to the higher 18 per cent rate for an extended period.
He emphasised that restaurants within hotels often cater to independent, walk-in customers, making the linkage with hotel room pricing commercially and legally tenuous. The tax treatment, he argued, should be determined by the nature of the service supplied — i.e., restaurant service — rather than the pricing strategy of a separate business vertical within the same premises.
“The case is closely tracked by the hospitality sector, particularly in light of algorithm-driven pricing by online travel platforms, where effective room tariffs can fluctuate significantly. The HC’s decision to continue interim protection signals judicial willingness to examine the validity of the rate notification itself, rather than relegating taxpayers solely to statutory remedies,” Rastogi added.
With pleadings now scheduled for completion by June, the matter could evolve into a precedent-setting ruling on classification principles and rate rationalisation under GST, according to experts.