GST Impact on Hotel & Tourism Industry After Rate Cut

Seep Gupta
Seep Gupta at July 20, 2022
GST Impact on Hotel & Tourism Industry After Rate Cut

Introduction

India's hospitality and tourism industry is expected to rise from Rs. 15.24 lakh crore (234.03 billion dollars in the USA context) in the year 2017 to Rs. 32.05 lakh crore (492.21 billion dollars in the USA context) by the year 2028.

Goods and Services Tax has helped the hospitality and tourism industry a lot. Implementation of GST has helped the sector by reducing costs for customers, harmonising taxes, reducing business transaction costs etc. Although it has its own challenges and obstacles to pass through.

The hospitality and tourism sector provides many employment opportunities to a large population and to various micro, small and medium entrepreneurs dependent on it. In this article, we will delve deeper into the effects and impact of GST on hotels and on the tourism industry.

Contribution of Tourism and Hospitality Sector to India’s GDP (Gross Domestic Product)

The tourism and hospitality sector in India contributes a lot to the Indian Gross Domestic Product. It accounts for 7.5 per cent of the GDP and is the largest foreign exchange earner for the country. In 2016, it is estimated that the tourism and hospitality sectors in India have contributed 47 billion US dollars directly.

It is expected that the direct contribution of the travel, tourism and hospitality sector will grow at 7.2 per cent per annum, from 2015 to 2025 with the contribution expected to reach 160.2 billion USA dollars by 2026.

Current Rate of Goods and Services Tax on Hotels and on Tourism Sector

In the recent 47th meeting of the GST council which was held in Chandigarh on the 28th and 29th of June, the Union Finance Minister of India Ms Nirmala Sitharaman changed the GST rates on hotel rooms and on other accommodations according to their tariff. The changed GST rates structure is given below.

  • On hotel Rooms which have rent rates from Rs 0 to Rs 1,000 per day, GST rates are exempted till the 17th of July; after that 12% of GST will be applied.
  • On room rent from Rs. 1001 to Rs, 2499 per day, 12% of the GST rate will be applied with full ITC (Input Tax Credit).
  • On room rent from Rs 2500 to Rs 4999 per day, 18% of the GST rate will be applied with the full input tax credit.
  • On room rent from Rs 5000 and above per day, 28% of the GST rate will be applied with the full input tax credit.
Sr. No Room Rent GST Rate
1 INR 1 to Rs. 1,000 per day 12% of GST Rate will be applied from the 18th of July 2022
2 Rs 1,001 to Rs 7500 per day

12% of the GST rate will be applied to hotel rooms with accommodation, food and beverage services.

 
(i) The “Hotel Accommodation” should have a value of supply above one thousand one rupees but lesser than seven thousand five hundred rupees per unit per day.

3 More than Rs 7501 18% of GST Rate will be applied

Tax Rates on Hospitality and Tourism Sector under Pre-GST Regime

Before the enactment of the GST rate, like other industries, the hospitality and tourism sector in the Indian economy was liable to pay multiple taxes such as VAT, luxury tax, service tax etc. A hotel room where the room tariff exceeded Rs, 1000 was liable for service tax at 15 per cent. 40 per cent of abatement was allowed on tariff value, thus bringing down the practical tax value to 9%. The VAT with other multiple taxes would apply on top of this.

60 per cent of abatement was there for the restaurants during the pre-GST regime, which means that the service tax rate was charged at 6 per cent, apart from the addition of VAT, bills for bundled and collective services like social functions such as marriages and seminars were taxed with an abatement of 30 per cent.

The most drastic effect of the VAT (Value Added Tax) was that the end customer had to pay all types of taxes, thus resulting in the increased end cost. Hoteliers and hospitality businesses did not get any ITC on the taxes they paid, because service tax could not be set off against state taxes (VAT) and vice-versa.

Pros of Goods and Services Tax

However, there are certain pros of GST which have been discussed below:-

  • Administrative Ease

GST law has abolished multiple taxes and has made taxation procedures quite seamless and easier. It has led to a reduction in procedural steps and more chances to facilitate the smooth taxation process.

  • Clarity for Consumers

GST regime has made the process of taxation quite easier for the consumers. Consumers now do not need to deal with multiple taxes. And this will give them a clear picture of the taxes they are mandated to pay.

  • Improved Quality of Service

With just one tax to compute, checking out processes in hotels and in resorts have become easier. Now people do not need to wait in long queues to pay their taxes and for their billing process.

  • Availability of Input Tax

The GST regime has made claiming and availing of Input Tax Credit quite easier and more convenient for the tourism and hospitality industry. Now the hospitality and tourism sectors will get full Input Tax Credit on their inputs. Earlier before the GST regime, this process was quite complicated.

Cons of Goods and Services Tax Regime

As everything has its pros and cons. GST regime has also its cons but the pros are outweighed by the cons.

  • Increased Technological Burden

GST regime requires businesses to become tech savvy and tech-friendly. As GST processes and compliances are quite complicated, businesses and organisations need to be up to date and on par with advanced technology to implement the GST taxation regime.

  • Increased Costs

GST regime has led to increased and higher costs. Even with GST charged at 18% on hotel rooms in Maharashtra, there is only a minimal reduction in the costs. Businesses have to recover the additional cost of the advanced technology from their customers which might sometimes lead to higher tariffs.

  • Disparity with Asian Counterparts

As India is becoming a key player in the hospitality and tourism sector on the global level, we are still lagging behind many south Asian countries such as Singapore and China. These countries provide world-class hospitality facilities with very low tax rates. That’s why these countries are number one on tourist's wishlists in the world.

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