The Impact of GST on the Hotel Industry: A Comprehensive Guide

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Date: 03 Feb 2023


Impact of GST on The 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 introduction of GST has benefited the industry by lowering customer expenses, harmonising taxes, and lowering the costs of corporate transactions, but it also comes with several difficulties. The effects of the GST on the hospitality and tourism sectors will be examined in this article.

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.

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.

Hospitality And Tourism Under GST Regime 

The hospitality industry will profit from standard and uniform tax rates under the Goods and Service Tax, as well as from 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

 

GST Rates For Hotels Based On Room Tariff (Upto 30th September 2019)

Tariff Per Night

GST Rate

<Rs.1,000

No Tax

Rs.1,000 - 2499.99

12%

= or > INR 7,500

28%

GST Rates applicable for Hotel Industry

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.

Particulars

Amount

Amount

  1. 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

  1. 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

  1. 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 

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. There is just slight cost savings in both situations, 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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