Indian tourism and hospitality industry has justly been touted as one of the key drivers of the economy, given the rise of an ambitiously expanding middle class and increased disposable income of this population bracket. Currently, it accounts for 7.5 percent of the country’s GDP, with a promised growth of about 16.1 percent CAGR, sweeping in approximately Rs. 2796.9 thousand crore by 2022, as reported by KPMG. In this article we'll discuss impact of GST on hotel industry, impact of GST on hotel industry project and much more.
It also accounts for the most amount of FDI (Foreign Direct Investment), a fact supported by the Ministry of Tourism report which marked a 32 percent increase year-on-year, reaching US $2.278 billion as of April 2017. Additionally, with business travel spending in India expected to treble (from US $30 million in 2015) by 2030, and international hotels and chains increasingly leaning towards India as an investment hub, the hospitality industry looks all set to contribute a major chunk to the country’s economy which is said to be GST impact on hotel industry.
While the potential in this segment seems unmatched by any other industry in the financial landscape of the country, the fact remains – hotel industry has also been one of the most cripplingly taxed industries, what with multiple cascading taxes (VAT, service tax, luxury tax, etc.) ballooning into a whopping 20-30% tax rate, effectively eating away at operational costs and reducing profits.
No wonder GST in hotels with its reduced standardized rates and perks is being looked at with hope by many of the businesses in this sector, as this move currently seems to be the only way forward to incentivize and strengthen a growing component of the nation’s economy after GST on hotels, but one that is saddled with far too many taxes to make noticeable progress.
However, does this mean only roses and peaches await the hospitality industry? Let us dive right in to find out if that is the case.
Before you get all charged up to make that over-planned and long-awaited Andaman holiday come true, replete with all the airs of a lavish stay at a five-star hotel in the thick of those islands, don’t forget to take a look at GST’s breakdown blueprint – this will certainly have you squirming – and burning a deeper hole in your pocket than you imagined. And going by how GST has been hailed as godsend from no less than the political gods of our country for months now, clueless others like you will be unpleasantly surprised as vacations get costlier; when in fact, the GST on hotel industry discourse had all of us believing it was only going to get cheaper - what with all the travel accommodation rates getting slashed down.
That is effectively not the case – as the 12 through 28% of Goods and Services Tax (GST) rate levied on the hospitality/hotel industry signifies. Especially for hotel owners, as your fate could lie anywhere, depending on what your turnover and services are.
Have a look at the table below to gain a cursory understanding of GST rates applicable to the hotel industry:
|Room Tariff per night (INR)||GST Applicable|
|< INR1000||0% (no tax)|
|INR >=1000 but < 2500||12%|
|INR >=2500 but <7500||18%|
|>= INR 7500||28%|
Depending on this breakdown, budget hotels are the ones to benefit the most from the implementation of GST, while the mid and high-category hotels falling under the 18-28% GST slab are expected to be bearing the brunt of the reformed tax policy. Succinctly put, in the words of General Manager, Palm Beach and general secretary of Hotel and Restaurant Association of AP, Mr. Sandeep Reddy, prices could easily double for a simple weekend holiday package earlier costing INR 10,000. This calculation obviously rests on a near-accurate observation that most travellers usually opt for mid-range and/or luxury hotels, which will now be significantly impacted at least for some time – with lesser people reluctant to shell out more for the exact same services offered.
Does this mean budget hotels will hold the top spot with more travellers flocking to these low-budget havens for cheaper accommodation?
Yes, but this works only for budget-conscious travellers and does not quite include the larger pool of customers, and since budget hotels do not offer the same kind of services as do mid and high-category hotels, there is unlikely to be a sudden spurt in demand for the same among this section of consumers that is willing to pay slightly more for premium services. However, the current GST slab might deter these very consumers from paying excessively for mid to luxury-range services, given there would be no material change in the services offered. The only long-term solution then, for hotels affected may be to reduce their average room rates (ARR) to maintain a steady influx of business. This is something that the end consumer will benefit from immensely in the long run. The hotel owners? Not so much, as they find themselves scrambling to maintain competitive rates while reeling under the strain of staying afloat in the midst of inflated operational costs, those being commodities and labour.
And while GST rates do not spell much cheer for hotels as such, they do provide some relief as regards another major component of the hospitality industry – that being, the restaurant business which squarely comes under the Food and Beverage (F & B) sector, and looks set to reap marginal benefits from the GST implementation.
Here’s how restaurant services (as per their yearly turnover) will now be taxed under GST:
|Establishment Type and Services||GST Rate Applicable|
|At establishments with turnover of <INR 75 lakh||5% (Composition Scheme)|
|Non-AC restaurants not serving alcohol||12%|
|Non-AC restaurants serving alcohol||18%|
|Restaurants with AC or Central heating (whether serving or not serving alcohol)||18%|
|Partly AC and partly non-AC restaurants (includes those serving and those not serving alcohol)||18%|
|AC Restaurants inside 5-Star Hotels||18%|
Supply of food and drinks, banquet and outdoor catering services will attract a rate of 18% GST, with banqueting services profiting the most from this reformed policy; considering they earlier used to attract a tax of 23-25 percent, in addition to luxury taxes levied by respective state governments. So if you are a banquet business looking to fill up your yearly calendar, time, and GST, are definitely on your side, as customers now make a beeline for reasonable and affordable banqueting services.
Interestingly, the tax on restaurants in luxury and five-star hotels was brought down to 18% from the erstwhile-proposed 28% only after stiff opposition from the hotel industry. With not much of a gap lying between services provided by, let’s say, a four-star hotel and a five-star one, and the rates being the same (18%), customers certainly stand to gain much in this regard. This negligible difference in services though would be most felt in terms of payment – for customers opting for rooms priced above INR 7500 and feeling a pocket pinch by an excess of 10% - for an overall experience which might materially just be the same before GST was introduced.
Evidently not, as this complex exercise undertaken by the government does have some positives to offer.
Comparison between the pros and cons of GST on a basic, mundane level points to a mixed bag of gifts and unexpected, unwelcome twists thrown in together. At best, GST impact on the hotel industry may be perceived as a double-edged sword, where as a hotel or restaurant business you simply cannot take advantage of the leniency, without feeling the pinch of the mandates.
For starters, it would not be an exaggeration to expect small and large businesses, as well as related industry players to experience frayed nerves for at least six more months, given all these stakeholders would now to have to go through the grind of comprehending how to navigate the GST portal and all that it entails. With registration and filing requirements now becoming a non-negotiable zone, companies will find themselves struggling to keep up with the pace, while attempting to make a seamless transition into GST world.
It has been close to two months since GST came into effect, and yet, many firms still have no idea how they can pass on the benefit of the input credit to customers, given they are clueless about the amount of credit they will receive that can be later adjusted. Moreover, working capital might shoot up for businesses dealing with low-grade and unregistered vendors who will not be able to claim input credit on purchases made.
There is still a lack of understanding about the tax slabs for various categories of hotels and restaurants, with the possibility that consumers may still be paying double taxes – multiple taxes under the previous system as well as GST. This is something that can only be tackled with time, and with adequate training and guidance provided to these industry players. Companies and firms too will need to invest substantial time, resources and effort on their part to get GST-compliant to avoid legal glitches later.
While GST has been heralded as a move that will compel the hospitality industry to upgrade its services at standardized rates, murmurs and protests from different corners in the industry continue to make their way in – with hopes that a standard rate of 10-15% would be accepted and implemented, thereby lending a competitive edge to the Indian hotel industry against the backdrop of its neighbouring counterparts – who also happen to be in the race - for the top spot in the tourism and hospitality map.
Whether or not GST rates in this regard would be amended depends on how efficiently the hospitality sector manages to make this transition, while still not crumbling under the sudden aftershock of it.
Under the GST tax outline, new terms such as ‘supply of service’, time of supply, location of recipient of said supply, place of supply, etc. would also need to be understood in an in-depth manner to facilitate proper categorizing of services and ensuring a smooth transition.
The government will do well to consider bringing electricity and alcohol consumption too under the ambit of GST, so as to do away with multiple taxes in these segments – this will not only aid these sectors and the broader hotel industry to operate on a more steady base, but will also pave the way for end consumers to be benefited by these inclusions, rather than being overburdened by their exemption.