GST for the Hotel Industry & How it Affects Your Bottom Line

Given the advent of an ambitiously rising middle class and increased spending income of this demographic category, the Indian tourism and hotel industry has rightly been lauded as one of the primary drivers of the economy. According to KPMG, it now contributes 7.5 percent of the country’s GDP, with a projected growth rate of 16.1 percent CAGR, bringing in about Rs. 2796.9 thousand crores by 2022. This blog will go through the impact of GST on the hotel sector, the impact of GST on hotel industry projects, and much more.

Facts Related to GST and Hotel Industry

According to a Ministry of Tourism data, it also receives the largest FDI (Foreign Direct Investment), which shows a 32% growth year on year, reaching US $2.278 billion in April 2017.

Furthermore, with business travel spending in India expected to triple (from $30 million in 2015) by 2030, and international hotels and chains increasingly looking to India as an investment hub, the hospitality industry appears poised to contribute a significant portion of the country’s economy, which is said to be GST impact on the hotel industry.

While the potential in this area appears to be unrivaled by any other business in the country’s financial environment, the truth remains that the hotel industry has also been one of the most cripplingly taxed, with several cascading taxes (VAT, service tax, luxury tax, etc.) inflating into a huge 20-30 percent tax rate, effectively eating away at operating expenses and cutting revenues.

No surprise that GST in hotels, with its reduced standardized rates and perks, is being viewed with optimism by many businesses in this sector, as this move currently appears 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 burdened with far too many taxes to make significant progress.

Does this imply that only flowers and peaches await the hotel industry? Let’s take a look to see whether that’s the case.

GST Impact on Hotel Industry – Factual Angle

Indeed, the GST on hotel business talk had all of us assuming that it could only become cheaper, with all of the travel accommodation costs being lowered.

That is not the case, as evidenced by the 12 to 28 percent GST rate charged to the hotel industry. Especially for hotel owners, as your destiny might be determined by your turnover and services.

Take a look at the table below to get a quick overview of the GST rates that apply 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%

While GST rates do not bode well for hotels, they do give some relief for another significant component of the hotel industry – the restaurant business, which falls under the Food and Beverage (F & B) sector and stands to profit somewhat from GST.

Here’s how restaurant services (based on annual revenue) will now be taxed under GST:

Establishment Type and Services	GST Rate Applicable
At establishments with a 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 (including those serving and those not serving alcohol)	18%
AC Restaurants inside 5-Star Hotels	18%

The supply of food and beverages, banquet and outdoor catering services will be subject to an 18 percent GST rate, with banqueting services benefiting the most from this reformed policy, as they previously faced a tax of 23-25 percent, in addition to luxury taxes levied by respective state governments. If you are a banquet company trying to fill your yearly calendar, time and GST are definitely on your side, since clients are now looking for price sensible and economical banqueting services.

Surprisingly, the tax on restaurants in luxury and five-star hotels was reduced from the previously projected 28 to 18 percent only after strong protest from the hotel business. With little difference in services given by, say, a four-star hotel and a five-star hotel, and pricing being the same (18 percent), clients stand to benefit much in this aspect.

This little change in services would be primarily noticed in terms of payment – for clients selecting accommodations priced over INR 7500 and suffering a pocket pain of more than 10% – for an overall experience that could have been the same before GST was imposed.

So, from here on out, it’s mostly doom and gloom?

Not, because the government’s complicated activity has some benefits to offer.

Positive Impact of GST on Hotel Industry

1. The most evident benefit of the GST is the elimination of tax duality and the cascading impact of VAT, service tax, and service charge.
2. The elimination of various taxes will almost certainly result in a reduction in the formerly lengthy administrative procedure of tax computation, resulting in a more simplified taxing process that is also fundamentally time-saving.
3. Despite the disputed GST slab of 28% for some kinds of hotels, the hospitality industry as a whole would now find it easier to claim and use input tax credit, which was previously not feasible because the tax paid on inputs could not be offset against the output liability.
4. GST, while complex on the surface and difficult to understand at the moment, will undoubtedly lead to greater financial management and enhanced transparency in tax planning for hotel operations.

Negative Impact of GST on Hotel Industry

1. The sheer complexity of the GST compliance/implementation process, as well as filings necessary at many stages, will result in additional technical constraints, greater compliance expenses, and a lot of time and effort poured in, making the journey appear longer and more demanding.
2. With more money invested in becoming GST compliant, hotel and restaurant businesses may end up recovering the same from their customers, resulting in higher tariffs, which will, in a sense, defeat the purpose of GST as consumers come full circle and continue to pay more than they need to while also availing cross-services.
3. Though Small and Medium Enterprises (SMEs) stand to benefit greatly from the GST regime, they may now be required to acquire goods from registered dealers exclusively, failing which they would be required to pay full tax on shipments as would have been necessary under the previous tax plan.

Conclusion

A basic comparison of the positives and negatives of GST reveals a mixed bag of presents and unexpected twists tossed in together. At best, the impact of GST on the hotel industry can be viewed as a two-edged sword, since a hotel or restaurant business simply cannot take advantage of the leniency without feeling the pressure of the GST compliances.