GST on Hotel Rooms: A Guide for the Hospitality Industry

By 2028, the Indian hospitality and tourism sector will have grown from Rs. 15.24 lakh crore (US$ 234.03 billion) in 2017 to Rs. 32.05 lakh crore (US$ 492.21 billion). Although it has its difficulties, the GST's implementation has benefited the industry by lowering customer costs, harmonizing taxes, and reducing business transaction costs. This article will examine how the GST has affected the travel and hospitality sector.

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Table of Contents:

Overview of tax liability reduction

Importance of understanding advance tax and Section 87A

Advance Tax: Key Provisions

Who Needs to Pay Advance Tax?

Advance Tax Payment Schedule and Deadlines

Interest and Penalties for Non-Compliance

Understanding Section 87A Rebate

Calculating Tax Savings with Section 87A

Section 87A: Recent Changes and Restrictions

Optimizing Tax Liability: Advance Tax and Section 87A Together

Common Mistakes and Compliance Issues

Recent Notices and Taxpayer Challenges

Conclusion

Most Asked Questions

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Pre-GST Norms for Hotel and Tourism Industry

Under the previous VAT regime, the hospitality sector was subject to multiple taxes (VAT, luxury tax, and service tax), just like all other sectors of the Indian economy. A hotel was subject to a 15% service tax if the room rate was more than Rs. 1,000. The tariff was subject to a 40% abatement, lowering the effective service tax rate to 9%. On top of this would be the luxury tax and value-added tax, which ranges from 12% to 14.5%. The service tax was, however, charged at an effective rate of 6% on the F&B bills for restaurants due to a 60% abatement, in addition to VAT (12% to 14.5%). Bills for bundled services, such as social events (marriages, seminars, etc.), were exempt from taxes by 30%.

The final cost increased due to the VAT regime's cascading effect, where the final consumer paid a tax on tax. Central taxes, such as service tax, could not be deducted from state taxes (VAT), and vice versa, so hoteliers and other hospitality businesses did not receive any input tax credits on the taxes they paid.

GST Impact on Hotel and Tourism Industry

The hospitality industry stands to benefit from the Goods and Services Tax's standardized and uniform tax rates and its simple and more effective use of the input tax credit. The industry is drawing more foreign tourists than previously as the final cost to the end user declines. Ideally, this leads to increased government revenue, and this new tax system has many benefits that may eventually support the sector expansion. For example, complimentary food (such as breakfast) was taxed separately under VAT but will now be taxed as a bundled service under GST. Let's take a closer look at the rates for this sector:

GST Rates for Hotels according to Room Tariff (from 1st October 2019)
Tariff per Night	GST Rate
Less than Rs.1,000 (when situated in the precinct of a registered religious place/ charitable trust for the general public/or such body or authority, as notified)	Nil
Less than/equal to Rs. 7,500	12%
More than Rs. 7,500	18%

GST Rates for Hotels according to Room Tariff (Up to 30th September 2019)
Tariff per Night	GST Rate
Less than Rs.1,000 (when situated in the precincts of a registered religious place/ charitable trust meant for the general public/such body or authority, as notified)	Nil
Rs.1,000 -2,499.99	12%
Rs.2,500 -7,499.99	18%
Equal to or more than Rs. 7,500	28%

GST Calculation

Let's think about A's Bengaluru hotel stay. He selected extra food and spa services and reserved a room for Rs. 10,000 per night. Below is a summary of the expenses and GST figures:

Component	Cost	GST Rate (%)	GST Amount
Room Tariff (2 nights)	Rs.  20,000	18%	Rs.  3,600
Meals (Food & Beverages)	Rs.  3,000	12%	Rs.  360
Spa Service	Rs.  2,000	18%	Rs.  360

The entire package cost is Rs. 25,000.

GST Total: Rs. 4,320

Rs. 29,320 is the total amount owed (25,000 + 4,320).

GST Calculation on Hotel Rooms for Bundled Packages

• A hotel package usually includes several services, including: 

• Meals and Accommodations

• Spa services

• Additional facilities

The predetermined GST rate applies to the taxation of each component in a bundled package. Depending on the room tariff, taxes on hotel rooms usually range from 12% to 18%. The GST rates for food and beverage services, including GST on food, can vary and may be higher or lower than the rate for a hotel room. While other amenities may be subject to any of the four GST slabs—5%, 12%, 18%, or 28%—spa services are typically subject to an 18% tax.

GST on Cancelled Bookings

Hotel cancellations will be subject to the same GST rate as hotel rooms. For instance, if you pay 12% GST on the rent for a hotel room, you will also pay 12% GST when you cancel your reservation. It ensures that the government has a consistent income stream from the tourism sector and satisfies compliance requirements.

ITC for GST on Hotel Rooms

Hotels are eligible to receive an ITC for the GST paid on a range of inputs used in their business operations, such as:

• Building supplies for constructing or remodeling their homes

• Equipment and furnishings

• Guests get served with food and drinks.

• Gas, water, and electricity are examples of utilities.

• Pay and benefits for workers engaged in hotel operations

Conditions to Claim ITC for GST on Hotel Rooms

Hotels must make sure that the following requirements get fulfilled to claim the Input Tax Credit (ITC) for GST on hotel rooms and associated services:

GST registration

The Goods and Services Tax (GST) system requires the hotel to be registered.

A legitimate tax invoice

A legitimate tax invoice for the purchased goods or services must be in the hotel's possession. It includes:

• The invoice number

• Date of publication

• The recipient's and supplier's names and addresses

• An explanation of the products or services

• The supplier's GSTIN

• The overall tax amount and the tax rate

Use in Business

The products or services purchased must utilized for hotel operations-related business needs.

Timely Claim

The ITC must be claimed by the deadline, typically the date on which the GSTR-3B return for the applicable period must be filed.

Invoice matching

The GSTR-3B return includes the corresponding output tax liability statement to claim the ITC.

No Disqualification

Goods and services exempt from GST or not eligible for the ITC under the GST regulations cannot claimed for the ITC.

Mechanism of Reverse Charge

If the hotel pays GST under the reverse charge mechanism, it can claim an Input Tax Credit for the GST paid on the received supplies.

Composite Materials

ITC can claim the taxable portion of composite supplies, a mix of goods and services.

Particular Exclusions and Limitations

For certain kinds of goods or services that hotels use, there might be particular exclusions or limitations on claiming ITC.

Pros of GST

Administrative Simplicity

By eliminating other taxes, the GST reduces administrative steps and increases opportunities to simplify the taxation process.

Consumer Clarity

At times, it was challenging for the average person to distinguish between entertainment and a value-added tax. Under the GST regime, customers will only see one charge on their bill, providing them with a clear picture of the tax they are paying.

Enhanced Service Quality

How long do you have to wait in the hotel lobby while your bill gets prepared, fearing you will miss your flight home? Another benefit the hospitality sector can boast is that the check-out process at hotels and restaurants will now be quick, with one tax to calculate.

Input Tax Availability

Input tax credit (ITC) will be easier to claim and obtain for the tourism and hospitality sectors, and they will receive full ITC on their inputs. Before GST, balancing the tax paid on inputs (such as raw food ingredients, cleaning supplies, etc.) against output was not easy. It will be simpler under the GST regime.

The following tables illustrate the calculations of room tariffs before and after the implementation of GST:

I) BASIC ROOM	Before GST	After GST
Room tariff	5400	5400
Luxury charge (10% as per Maharashtra)	540
Service Tax @ 9%	486
GST @ 12%		648
TOTAL BILL	6426	6048
II) ROOM WITH COMPLIMENTARY BREAKFAST	Before GST	After GST
Room tariff	4400	4400
Complimentary breakfast	1000	1000
Luxury charge ( 10% as per Maharashtra)	440
Service Tax @ 9%	396
VAT @ 14.5% on food	146
GST @ 12%		648
TOTAL BILL	6382	6048
III) ROOM WITH COMPLIMENTARY BREAKFAST	Before GST	After GST
Room tariff	16000	16000
Complimentary breakfast	5000	5000
Luxury charge on Stay (10% as per Maharashtra)	1600
Service Tax @ 9%	1440
VAT @ 14.5% on food	726
GST @ 18%		3780
TOTAL BILL	24766	24780

Cons of GST

Increasing the Burden of Technology

There were many misunderstandings when the service tax was first implemented. Although GST provides clear guidelines for how each industry must handle its accounts and file returns, it will also require businesses to become more technologically savvy, which increases the cost and burden of compliance.

Higher Expenses 

 For example, food and drink were previously subject to an 18.5% tax in Maharashtra, and hotel rooms to a 19% tax. The cost reduction is negligible, even with the 18% GST charge in both situations. Companies can recoup the extra expense of new systems and technology from their clients, which could occasionally result in higher tariffs.

Inequity with Asian Correspondents

India must provide services comparable to those offered worldwide as it grows in importance in the hospitality and tourism sector. One major factor contributing to their high ranking on traveler wish lists is the extremely low tax rates for their hospitality industries, which are 8% and 7%, respectively, in our Asian neighbors, Japan and Singapore. India, a popular destination for tourists worldwide, still loses out on backpackers because of these exorbitant prices.

Conclusion

By standardizing tax rates and streamlining the tax structure nationwide, the GST regime has lowered taxes and revolutionized the hospitality sector. Before GST, the hotel sector had to deal with complicated state and federal taxes, which caused misunderstandings and inefficiencies. Therefore, to control their travel expenses, individuals and businesses should know the current GST rates on hotels. So, you can lower business transaction costs and guarantee hassle-free annual return filings by ensuring GST compliance and input tax are applied consistently.  

FAQ

Q1. What are the current GST rates on hotel accommodations?

Hotel GST rates vary according to room tariffs: 12% for rooms up to Rs. 7,500, 18% for rooms over Rs. 7,500, and 0% for rooms under Rs. 1,000 (within religious precincts). These rates streamline compliance and harmonize industry-wide taxation.

Q2. Are there any exemptions from GST for hotel rooms? 

There aren't any general GST exemptions for hotel rooms. Very small hotel operators, however, will continue to be exempt from GST if their yearly revenue is less than Rs 20 lakh.

Q3. Are homestays and guesthouses subject to GST? 

Indeed, a GST rate of 12% to 18% applies to homestays and guesthouses. The room tariff determines the applicable rate. The GST rate is 12% for rooms that cost up to Rs. 7,500 per night. The rate is 18% for those priced over Rs. 7,501.

Q4. Does the GST rate on hotel rooms vary by state? 

No, hotel room GST is the same throughout India. States may have different rates for other services and taxes, but it is the same for all states.

Q5. Is GST applicable on food and other services served by hotels?

Yes, food and other services offered by hotels are subject to GST. Depending on whether it is served in a restaurant or as part of a package, the GST on food and beverages is either 5% or 18%. 

Q6. Is GST applicable on room rent above Rs. 5,000? 

Yes, a 12% GST rate applies to room rentals over Rs. 5,000 per night.

Q7. How has GST impacted the overall cost of hotel stays and dining?

By substituting a single tax for several taxes, such as VAT, service tax, and luxury tax, GST has streamlined the tax system. Generally speaking, this has decreased the overall tax burden, lowering the cost of dining and hotel stays for customers, particularly those in the mid-range and budget segments.

Q8. How does GST affect luxury hotels and high-end services?

Due to higher GST rates (28%), luxury hotels and high-end services may become more costly. Higher prices may discourage some foreign travelers, which affects their ability to compete, particularly in the global luxury travel market.

Q9. Can businesses claim GST Input Tax Credit (ITC) on hotel stays?

Companies that use hotel accommodations for business purposes can claim the Input Tax Credit (ITC) on the GST paid. The hotel must submit a GST-compliant invoice along with the business's GST number to claim ITC. This lowers the cost of business travel.

Q10. What happens to the GST rate if I cancel a hotel booking?

Regardless of the rate used at the time of the original reservation, the GST rate for hotel cancellations is scheduled at 18%. The cancellation fee will always incur 18% GST, irrespective of whether the booking is taxed at 12%, 18%, or 28%.