Masters India

Impact of GST on Hotel Industry

Team Masters India
Team Masters India at March 23, 2023

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.

Ground Reality of GST: A Factual Look

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.

So is it mostly all gloom and doom from this point onwards?

Evidently not, as this complex exercise undertaken by the government does have some positives to offer.

The good

  • The most obvious benefit gleaned from the GST compliance scheme is the removal of duality of taxes and the cascading effect of VAT, service tax and service charge done away with. For instance, the way complementary breakfasts will now be taxed (as a bundled service under GST and not separately under VAT) is a fine example of how the benefits are already pouring in. With no more multiple taxes snowballing into inflated consumer bills and such small nuggets of happiness for the average pocket-conscious consumer, this means guaranteed value for money, thereby encouraging consumers to spend on such experiences, which eventually helps the hospitality sector as well.
  • Abolition of multiple taxes will likely lead to a drop in the erstwhile lengthy administrative process of tax calculation, thereby leading to a more streamlined taxation process, and one, that is essentially time-saving as well.
  • Have you previously been in a position where you got confused about how VAT, service tax or entertainment tax ended up landing in your bill? If you have ever paid taxes for services without understanding why you were doing so, sometimes even in excess of what was due to you, then this is a time to rejoice for you can now get a clear picture of the tax you are paying. This naturally makes for an enjoyable consumer experience, with less room for cluelessness.
  • Despite the contentious GST slab of 28% for certain categories of hotels, the hospitality industry as a whole, will now find it easier to claim and avail input tax credit; something that was not possible pre-GST, as tax paid on inputs could not be adjusted against the output liability. Now hotels shall be able to take advantage of credit on almost all durables and raw materials purchased, and construction and renovation carried out in furtherance of the business, subject to certain conditions, those being: Possession of tax invoice/debit note, receipt of goods/services, payment of tax charged to the concerned government on such supply, furnishing of GST return by supplier.
  • GST, though complex on the surface and challenging to grapple with at the moment, will assuredly lead to improved financial management and increased transparency in tax planning of establishments in the hotel industry. With accounting taken seriously and accurate records maintained in profitability books of hotels, there will be less room for tax avoidance/evasion, thus paving the way for legal and corrupt-free proliferation of the hotel industry.

The bad

  • The significance of a robust hospitality software cannot be discounted, and while this sector takes the lead in adapting to technological advancements for maintaining its reach and reliability in the market, the response of the industry to the onslaught of GST has been at most, cautious and resentful. With the utter complexity inherent in the GST compliance/implementation process and filings mandated at multiple stages, this will mean added technological burdens, increased compliance costs and a lot of time and effort pumped in, making the journey seem longer and more exhausting.
  • With more money being invested in being GST compliant, hotel and restaurant businesses might end up recovering the same from their customers, leading to higher tariffs, which will, in a way defeat the purpose of GST as consumers come a full-circle and continue paying more than what they need to while availing cross-services as well.For example, the fact that electricity despite being a significant input cost for the hospitality industry has been kept exempt from the purview of GST, predictably means solar and wind power companies will not be able to avail input tax credit on fuel and machinery used against the output (electricity), leading to the surplus tax being rolled over to the end consumer, thereby making power consumption a costlier affair for the common man. Ironically, with electricity being an exempt subject under GST, even hotel businesses will not be able to avail input credit on taxes paid for electricity, thus, rolling it over to consumers.
  • Though Small and Medium Enterprises (SMEs) are set to gain immensely from the current GST tax regime, they may now be obligated to purchase commodities from registered dealers only, failing which, they would be liable to pay full tax on supplies as would have been due under the normal tax scheme. This is a glaring disparity since composition dealers were earlier (under the VAT scheme) not mandated to pay taxes on supplies delivered by unregistered persons. Not only this, since they are not allowed to avail input tax credit on supplies purchased, this will ultimately have them pay taxes twice – first, to the registered dealer, and second, to the government. It also does not help that many SMEs may not even be able to avail of this feature unless they strictly deal in inter-state supplies.
  • As observed quite rightly by industry players, the surge of GST might lead to the emergence of a parallel economy, where some people do not opt for bills, leading to thousands of unaccounted transactions, and ultimately defeating the objective of GST. This is not an entirely impossible reality, given that people in India already try and sneak in transactions without billing the same, leaving this sector vulnerable to corruption and exploitation.
  • This is an opportune time when tourism and hospitality industries have exploded around the world throwing the spotlight harder on these revenue-generating pillars, and neighbouring countries in the Asian subcontinent (such as Japan, Singapore, Myanmar, Thailand, Indonesia, Dubai and the like) have indeed stepped up to this nation-building mission by keeping taxes low (5-10%), thus ensuring more footfalls in these tourism hotspots. In contrast, India’s steep 12-28% tax slab levied on stakeholders in the hospitality sector will only serve to drive tourists away and have them flock to more lucrative options, despite our country getting ranked high on tourist wish lists.

    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.

The journey ahead

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.

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