GST on Hotel Rooms and the Impact on the Indian Hospitality Industry (Effective September 22, 2025)

 

The Indian hospitality sector, encompassing everything from boutique hotels to large restaurant chains, has seen its tax structure significantly streamlined and rationalized under the Goods and Services Tax (GST) regime. Following the decisions from the 56th GST Council meeting, the taxation rules for accommodation and related services have been further refined, aiming to enhance affordability and simplify compliance.

The most critical factor determining the GST rate and the corresponding Input Tax Credit (ITC) eligibility is the nightly invoiced amount of the room.

---

New GST Rate Structure for Hotel Accommodation

The revised structure, which came into effect on September 22, 2025, significantly adjusts the tax burden for mid-range accommodations by reducing the rate from the previous 12% to a concessional 5%.

Description of Service	GST Rate	ITC Availability	Key Takeaway
Hotel accommodation with tariff ≤ ₹7,500 per unit per day	5%	Not allowed	A substantial rate cut from the earlier 12%, but the hotel cannot claim ITC on associated inputs.
Hotel accommodation with tariff > ₹7,500 per unit per day	18%	Allowed	The rate for premium and luxury accommodation remains unchanged, with full ITC available to the hotel.

Clarification on Tariff: GST is generally levied on the actual transaction value (the invoiced price) rather than the "declared tariff," though the terminology of the original notification may lead to confusion. Regardless, the two defined tax slabs simplify the levy process.

---

Input Tax Credit (ITC) Implications and Compliance

The dual-rate structure, particularly the concessional 5% rate, creates a complex ITC scenario that hospitality providers must manage meticulously.

1. 5% Slab (₹7,500 or less): This reduced tax incidence for guests comes at the cost of the hotel's ability to claim ITC. Since the supply of services at 5% GST is effectively treated as an exempt supply for the purpose of credit utilization, hotels cannot claim ITC on goods and services used exclusively for these budget and mid-range rooms.
2. 18% Slab (Above ₹7,500): For these premium accommodations, the hotel is fully eligible to claim ITC on all inputs (goods and services) used in the furtherance of this supply.
3. Apportionment Challenge (Rule 42/43): Hotels that operate with both categories of rooms (mixed supply) face the significant challenge of managing common input credits (e.g., linens, common area utilities, administrative services). They must meticulously maintain internal records and apply the complex Rule 42 (for inputs and input services) and Rule 43 (for capital goods) of the CGST Rules to reverse or proportionately reverse the ITC on common inputs based on the turnover of the respective slabs. This requires robust accounting and booking segregation systems.

---

GST on Food, Beverage, and Other Services

The taxation of restaurant, food, and beverage (F&B) services within a hotel is linked to the property's classification based on the highest-priced room it offers:

Service	GST Rate	ITC Availability	Applicability
Restaurant, F&B, or Catering	18%	Allowed	Only at "Specified Premises."
Restaurant, F&B, or Catering	5%	Not allowed	At "Non-Specified Premises."

Defining "Specified Premises"

A "Specified Premises" is a hotel or accommodation property where the tariff for any unit of accommodation exceeded ₹7,500 per night in the preceding financial year.

• Specified Premises: If a property qualifies as specified, all of its dining, F&B, and catering services are taxed at 18% with full ITC benefits, regardless of whether the guest is staying in a 5% room or an 18% room.
• Non-Specified Premises: If the property's highest room tariff is consistently ₹7,500 or less, both the accommodation (5%) and F&B services (5%) are taxed at the concessional rate without ITC.

Note: Services like banquet hall rentals, spa treatments, and other ancillary services generally attract 18% GST with ITC, as they are often classified separately from the core accommodation or restaurant service.

---

Impact on the Hospitality Sector and Travelers

1. Affordability for Travelers: The reduction from 12% to 5% on rooms up to ₹7,500 makes mid-range hotels significantly more affordable. For a room priced at ₹7,500, the final bill sees a reduction of ₹525 (a 7% drop in the total cost), making stays more attractive for domestic tourists and business travelers operating within a moderate budget.
2. Increased Occupancy: The reduced rates are expected to stimulate demand, especially in Tier-2 and Tier-3 cities, boosting occupancy rates and making the mid-market segment more competitive.
3. Compliance Burden: While beneficial for consumers, the mixed-supply rules require hotels with rooms across both slabs to implement rigorous accounting and credit management processes to ensure compliance and avoid potential tax liabilities or mismatches.

---

Illustrative GST Calculations

Scenario	Room Tariff	Applicable GST Rate	GST Amount	Total Invoiced Amount	ITC Eligibility
Budget/Mid-Range Stay	₹6,000	5%	₹300	₹6,300	Not Allowed
Premium/Luxury Stay	₹8,000	18%	₹1,440	₹9,440	Allowed
Meal (Specified Premises)	₹1,000	18%	₹180	₹1,180	Allowed

In summary, the GST reforms have unified the tax structure for the hospitality sector, using the nightly room tariff as the primary determinant for both the rate of tax and the availability of Input Tax Credit. While the lower rate provides a direct benefit to a large segment of travelers, it places a corresponding compliance responsibility on hotels, particularly those operating across different price segments.