Impact of GST on Hotel Industry
From Rs. 15.24 lakh crore (US$ 234.03 billion) in 2017 to Rs. 32.05 lakh crore (US$ 492.21 billion) in 2028, the Indian hospitality and tourism sector is predicted to grow. The impact of Goods and Services Tax GST in the hotel industry in India has been significant since its implementation in 2017.
Prior to GST, hotels were subject to multiple taxes, such as luxury tax and service tax, at different rates in different states. However, with the introduction of GST, all these taxes were replaced with a single tax, which led to a more streamlined tax system.
The GST rate for hotels varies depending on the room tariff, with rates ranging from 0% to 28%. The GST impact on the hotel industry has been felt across the entire supply chain, from hotel owners and operators to guests and travel agents.
The implementation of GST on hotels has also led to changes in pricing strategies and business models, as hotels have had to adjust to the new tax system to remain competitive in the market. Overall, the impact of GST on the hotel industry has been significant and has played a crucial role in shaping the industry since its introduction.
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Hospitality And Tourism Under Pre-GST
Under the former VAT regime, the hotel sector was subject to multiple taxes (VAT, luxury tax, and service tax), just like every other sector of the Indian economy. A hotel was required to pay service tax at a 15% rate if the room rate was more than Rs. 1,000.
The tariff value was subject to a 40% abatement, which reduced the service tax to an effective rate of 9%. On top of this, there would be the luxury tax and the Value Added Tax, which has a range of 12% to 14.5%.
However, there was a 60% abatement for restaurants, which meant that, aside from VAT (12% to 14.5%), the service tax was levied at an effective rate of 6% on the F&B bills. Bills for packages of services, such as social events (marriage, seminars, etc.), were subject to a 30% tax reduction.
The VAT system’s cascading effect, in which the final consumer paid a tax on tax, raised the overall cost. Since central taxes like service tax could not be offset against state taxes (VAT) and vice versa, hoteliers and hospitality enterprises did not receive any input tax credits on the taxes they paid.
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Hospitality And Tourism Under The GST Regime
Under the former VAT regime, the hotel sector was subject to multiple taxes (VAT, luxury tax, and service tax), just like every other sector of the Indian economy. A hotel was required to pay service tax at a 15% rate if the room rate was more than Rs. 1,000.
The tariff value was subject to a 40% abatement, which reduced the service tax to an effective rate of 9%. On top of this, there would be the luxury tax and the Value Added Tax, which range from 12% to 14.5%.
However, there was a 60% abatement for restaurants, which meant that, aside from VAT (12% to 14.5%), the service tax was levied at an effective rate of 6% on the F&B bills. Bills for packages of services, such as social events (marriage, seminars, etc.), were subject to a 30% tax reduction.
The VAT system’s cascading effect, in which the final consumer paid a tax on tax, raised the overall cost. Since central taxes like service tax could not be offset against state taxes (VAT) and vice versa, hoteliers and hospitality enterprises did not receive any input tax credits on the taxes they paid.
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Hospitality And Tourism Under GST Regime
The hospitality industry will profit from standard and uniform tax rates under the Goods and Service Tax and the simple and effective use of input tax credits. The sector draws more foreign tourists than before as the overall cost to the end customer declines.
There are several benefits to this new tax system that could support the industry’s growth in the long run, and in theory, this increases government income. Breakfast, for example, was taxed separately under the VAT system but will now be taxed under the GST system as a bundled service. Let’s take a closer look at the rates for this sector:
GST Rates For Hotels Based On Room Tariff (with effect from 1st October 2019)
| Tariff Per Night | GST Rate |
|---|---|
| Rs.1,000 | No Tax |
| Rs.1,001 – 7,500 | 12% |
| = or > INR 7,501 | 18% |
| GST Rates applicable for Hotel Industry |
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The Pros Of GST
- Ease of Administration – A reduction in administrative processes and additional opportunities to simplify the taxation process will result from the elimination of various other taxes by the GST.
- Clarity For Consumers – For the average person, it could be challenging to tell the difference between value-added and entertainment taxes. Customers would only see one charge on their statement under the GST regime, which will show how much tax they are paying.
- Improved Quality of Service – How often have you been forced to wait in a hotel lobby while fearing that you will miss your trip home because your bill wasn’t ready yet? The check-out procedure at hotels and restaurants will now be simpler, with only one tax to calculate, which is another benefit that the hospitality sector can take pride in.
- Availability Of Input Tax – The input tax credit (ITC) process will be made simpler for the tourism and hospitality sectors, and they will be eligible for full ITC on their inputs. Prior to GST, it was not possible to easily offset the tax paid on inputs (raw food for consumption, cleaning supplies, etc.) against the output. However, under the GST system, this will be simpler. Also Know More About: Benefits of Implementing GST
| Particulars | Amount | Amount |
|---|---|---|
| Basic Room | Before GST | After GST |
| Room Tariff | 2700 | 2700 |
| Luxury Charge on stay (10% as per Maharashtra) | 270 | – |
| Service Tax @ 9% | 243 | – |
| GST @ 12% | – | 324 |
| Total Bill | 3213 | 3024 |
| Room With Complimentary Breakfast | Before GST | After GST |
| Room Tariff | 2200 | 2200 |
| Complimentary Breakfast | 500 | 500 |
| Luxury Charge on stay (10% as per Maharashtra) | 220 | – |
| Service Tax @ 9% | 198 | – |
| VAT @ 14.5% on food | 73 | – |
| GST @ 12% | – | 324 |
| Total Bill | 3191 | 3024 |
| Room With Complimentary Meals | Before GST | After GST |
| Room Tariff | 8000 | 8000 |
| Complimentary Meal | 2500 | 2500 |
| Luxury Charge on stay (10% as per Maharashtra) | 800 | – |
| Service Tax @ 9% | 720 | – |
| VAT @ 14.5% on food | 363 | – |
| GST @ 18% | – | 1890 |
| Total Bill | 12383 | 12390 |
| A breakup of the hotel prices pre and post-GST Implementation |
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Cons Of GST
- Increased Technological Burden – There were several errors when the service tax was originally imposed. The GST has very specific rules about how each industry must manage its accounts and file returns, but it will force businesses to become tech-savvy, increasing compliance costs and technological burdens.
- Increased Cost – For instance, food and drink were previously taxed at 18.5% in Maharashtra, while hotel rooms were subject to a 19% tax. Both situations have slight cost savings, even with GST levied at 18%. Businesses can charge their clients an additional fee to cover the expense of technology and new systems, which in some cases may result in higher prices.
- Lack Of Parity With Asian Counterparts – We require services to be comparable to international prices as India becomes an even more significant player in the global hospitality and tourism sector. Because of their extremely low tax rates for the hospitality industry (8% and 7%, respectively), our Asian neighbours Singapore and Japan consistently rank highly on traveller wish lists. Although India is a popular tourist destination worldwide, its high prices prevent it from attracting the backpacker crowd.
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Transaction Value Per Unit (Rs) Per Day
The GST rate on hotel accommodation is determined based on the transaction value per room per day. Different tax slabs are applied depending on the room tariff charged to the customer.
Amendment (Effective from 18th July, 2022): As per the 47th GST Council Meeting, significant changes were made to the GST rate structure for the hospitality sector. These amendments impacted the categorization of room tariffs under GST slabs and are important for businesses to stay compliant.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
Frequently Asked Questions
- What is the Basic GST Rate Applied to Hotel Stays?The GST rate on hotel stays depends on the room tariff. No GST is charged if the tariff is up to ₹1,000 per night. For rooms priced between ₹1,001 and ₹7,500 per night, the GST rate is 12%. For rooms costing above ₹7,500 per night, the rate is 18%. This tiered system ensures that higher-end hotels face a higher tax rate than budget accommodations.
- How Has GST Impacted Hotel Pricing and Customer Bills?GST has streamlined the tax structure for hotels, replacing multiple previous taxes. This transparency benefits customers by clearly showing the tax breakdown on bills. However, depending on the hotel’s pricing and services, the applicable GST rate can increase the final bill, especially for luxury hotel stays. Budget hotels, on the other hand, are less affected due to lower or no GST.
- Are Food and Beverage Services in Hotels Taxed Under GST?Yes, food and beverage services in hotels are taxed under GST. The rate varies based on the type of establishment. Generally, non-AC restaurants inside hotels attract 5% GST, while AC restaurants or those serving alcohol attract 18% GST. If the hotel room tariff exceeds ₹7,500, the GST rate on food and beverages rises to 18%.
- How Does GST Affect the Hotel Booking Process for Businesses?Businesses can claim input tax credits (ITC) on hotel bookings under GST if the stay is for business purposes. This makes hotel bookings slightly more affordable for companies. However, the booking process remains the same, with businesses paying the applicable GST upfront and later claiming the credit on eligible bookings through their GST filings.
- Has GST Impacted Employment in the Hotel Industry?The introduction of GST has had a mixed impact on employment in the hotel industry. On one hand, higher taxes on luxury stays and services may have led to reduced demand, affecting jobs in that segment. However, the simplified tax regime has also boosted the growth of the mid-range hotel market, creating employment opportunities. Overall, the long-term impact on jobs has been balanced.
