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Impact of GST on Hospitality Industry

How will the new tax policy affect the tourism and hospitality industry in India? Let our experts enlighten you about the same...

Updated on:  

08 min read

Hospitality and tourism industry in India is expected to rise from Rs.15.24 lakh crore (US$ 234.03 billion) in 2017 to Rs.32.05 lakh crore (US$ 492.21 billion) by 2028. Implementation of GST has helped the sector by reducing costs for customers, harmonising taxes, and reducing business transaction costs, but has its own set of challenges.In this article, we will look at the effects of the GST on the hospitality and tourism industry. 

Hospitality and Tourism under Pre-GST

The hospitality industry, like every other sector in the Indian economy, was liable to pay multiple taxes (VAT, luxury tax, and service tax) under the previous VAT regime. A hotel where the room tariff exceeded Rs.1,000, was liable for service tax at 15%. 

An abatement of 40% was allowed on the tariff value, thus bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12% to 14.5%) and luxury tax, would apply on top of this. 

However, for restaurants, there was 60% abatement which meant that the service tax was charged at an effective rate of 6% on the F&B bills, apart from VAT (12% to 14.5%). Bills for bundled services like social functions (seminars, marriage etc.), were taxed with an abatement of 30%. 

The cascading effect of the VAT regime where the end consumer paid a tax on tax, increased the end cost. Hoteliers and hospitality businesses did not get any input tax credit on the taxes they paid, as central taxes like service tax, could not be set off against state taxes (VAT) and vice-versa.

Hospitality and Tourism under the GST Regime

Under the Goods and Service Tax, the hospitality sector stands to reap the benefits of standardised and uniform tax rates, and easy and better utilization of input tax credit. As the final cost to the end user decreases, the industry attracts more overseas tourists than before. 

This ideally results in improved revenues for the government, and there are many pros to this new tax regime which could help the industry’s growth in the long run. For instance, complementary food (like breakfast) was taxed separately under VAT, but now it will be taxed under GST as a bundled service. Let’s have a look at the rates for this industry in detail:

GST Rates for Hotels based on Room Tariff (with effect from 1st October 2019)
Tariff per NightGST Rate
< Rs.1,000No Tax
Rs.1,001 -7,50012%
= or > INR 7,50118%
GST Rates applicable for Hotel Industry
GST Rates for Hotels based on Room Tariff (Up to 30th September 2019)
Tariff per NightGST Rate
< Rs.1,000No Tax
Rs.1,000 -2,499.9912%
Rs.2,500 -7,499.9918%
= or > INR 7,50028%
GST Rates applicable for Hotel Industry

The Pros of GST

Administrative Ease

GST will abolish several other taxes, leading to a reduction in procedural steps and more chances to streamline the taxation process.

Clarity for Consumers

It was sometimes difficult to differentiate between a Value Added Tax and an entertainment tax for the common man. However, under the GST regime customers will see only a single charge on their bill and it would give them a clear picture of the tax they are paying.

Improved Quality of Service

How many times have you had to wait in the hotel lobby wondering if you would miss your flight back home because your bill was still being prepared? With just one tax to compute, the checking-out process at hotels and restaurants will now become easier – another perk that the hospitality industry can brag about.

Availability of Input Tax

The tourism and hospitality industry will find it easier to claim and avail input tax credit (ITC) and will get full ITC on their inputs. Before GST, the tax paid on inputs (raw edibles for food, cleaning supplies etc.) could not be adjusted against the output without any complications. However, this will become easier in the GST regime.

Edit
ParticularsAmountAmount
I) BASIC ROOMBefore GSTAfter GST
Room tariff27002700
Luxury charge on Stay( 10% as per Maharashtra)270 
Service Tax @ 9%243 
GST @ 12% 324
TOTAL BILL32133024
II) ROOM WITH COMPLIMENTARY BREAKFASTBefore GSTAfter GST
Room tariff22002200
Complimentary breakfast500500
Luxury charge on Stay( 10% as per Maharashtra)220 
Service Tax @ 9%198 
VAT @ 14.5% on food73 
GST @ 12% 324
TOTAL BILL31913024
III) ROOM WITH COMPLIMENTARY BREAKFASTBefore GSTAfter GST
Room tariff80008000
Complimentary breakfast25002500
Luxury charge on Stay( 10% as per Maharashtra)800 
Service Tax @ 9%720 
VAT @ 14.5% on food363 
GST @ 18% 1890
TOTAL BILL1238312390
A break-up of the hotel prices pre and post GST implementation

The Cons of GST

Increased Technological Burden

When the service tax was first introduced, there were a lot of mix ups. GST has very clear guidelines on how each industry needs to manage their accounts and file returns but it will require businesses to become technologically adept, increasing the technological burden and cost for compliance. 

Increased Costs 

In Maharashtra, for instance, hotel rooms were earlier taxed at 19% and food and beverage at 18.5%. Even with GST charged at 18%, there is only a minimal cost reduction in both cases. Businesses can recover the additional cost of technology and new systems from their customers, which might – in some instances – lead to higher tariffs.

Lack of Parity with Asian Counterparts

As India becomes an even bigger player in the global hospitality and tourism industry, we need services to be at par with global rates. Our Asian neighbors such as Japan and Singapore have very low tax rates for their hospitality sector (8% and 7% respectively) which is an important reason for them ranking high on tourist wishlists. India is a global tourism hotspot, but it still loses out on the backpacker crowd due to these high rates.

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