Impact of GST on Hotel Industry

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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GST Rate Structure for Hotel Rooms

The GST rate on hotel rooms in India varies based on the declared room tariff per night. Here’s a breakdown of the structure:

• Tariff below ₹1,000: No GST
• ₹1,001 to ₹7,500: 12% GST
• Above ₹7,500: 18% GST

Along with room bookings, hotels often provide bundled services such as restaurant meals, spa services, banquets, or conference halls. These attract different GST rates:

• Restaurant services (AC or non-AC): Generally taxed at 5% or 18%, depending on ITC eligibility.
• Banquet and event hall rentals: Attract 18% GST
• Bundled hotel packages (room + food + facilities): GST is charged based on the composite or mixed supply rules.

With BUSY Accounting Software, hotel businesses can automate tax classification, apply the correct GST rate on each service, and generate itemized GST-compliant invoices, ensuring accurate billing for both room and non-room services.

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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

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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.

Explore Here – Advantages and Disadvantages of GST

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.

Amendments and GST Council Updates

Over the years, the GST Council has introduced key changes affecting hotel tariffs to promote tourism and simplify tax compliance.

In the 37th GST Council Meeting (September 2019), the GST on hotel room tariffs was revised to align rates with actual charges (not declared tariffs).

• Rooms below ₹1,000: Exempt
• ₹1,001–₹7,500: 12% GST
• Above ₹7,500: 18% GST

The 47th GST Council Meeting (June 2022) clarified GST on services like banquets and room rentals, especially when offered as part of composite hotel packages. It also reaffirmed that businesses renting rooms in guest houses or hostels may attract GST if they meet registration thresholds.

BUSY Software stays updated with all Council changes and automatically applies the correct GST rates in billing, helping hotel owners stay compliant effortlessly.

Reverse Charge Mechanism and IGST Scenarios

The Reverse Charge Mechanism (RCM) applies when a hotel procures goods or services from an unregistered vendor (e.g., a local decorator for an event). In such cases, the hotel (recipient) must pay GST directly to the government, not the vendor.

RCM also applies in specific IGST scenarios, like:

• If a hotel located in one state hires services from an unregistered supplier in another state.
• If services fall under notified categories (e.g., legal services or GTA services).

BUSY Software allows businesses to identify RCM transactions, generate self-invoices, and track ITC eligibility, ensuring that reverse charge liabilities are paid and reported correctly in GSTR-3B.

Common GST Compliance Challenges for Hotels

Hotels often struggle with complex billing structures involving multiple services like room rent, restaurant dining, banquets, spa, and laundry. Key challenges include:

• Correctly classifying bundled vs. composite services
• Applying different GST rates (5%, 12%, 18%) within one invoice
• Handling IGST vs CGST/SGST on bookings from other states
• Reconciling Input Tax Credit (ITC) on common inputs like utilities and consumables
• Managing advance payments, cancellations, and refunds

BUSY Software simplifies this by enabling multi-service invoicing, rate-wise tax splitting, auto-calculated ITC, and accurate GST return filing. It supports hotel businesses in managing all aspects of GST in a single, unified platform.

Conclusion

GST has undoubtedly simplified the tax structure for the hospitality industry by bringing all services under a unified system. However, with multiple rate slabs, bundled offerings, and evolving council decisions, compliance can be complex, especially for hotels offering various services.

While the updated rules bring clarity, they require hotels to be more vigilant with billing, classification, and return filing. This is where BUSY Accounting Software becomes an essential tool, offering automation, accuracy, and compliance tracking tailored for hotel operations.

Using BUSY, hoteliers can reduce manual errors, ensure faster invoicing, and focus more on delivering quality service than chasing tax compliance.