🏨 Unlocking Growth: FHRAI Urges Finance Ministry to Overhaul GST for the Hospitality Sector

 

The Federation of Hotel & Restaurant Associations of India (FHRAI), the apex body for the Indian hospitality industry, has submitted a comprehensive representation to the Finance Ministry, urging an urgent rationalization of the Goods and Services Tax (GST) framework. The industry argues that existing GST anomalies are creating structural challenges, stifling investment, and hindering the sector's global competitiveness.

The key demands presented to Finance Minister Nirmala Sitharaman focus on three critical areas: restoring the seamless flow of Input Tax Credit (ITC), simplifying the tax structure for food & beverage (F&B) services, and providing an amnesty scheme to resolve legacy disputes.

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1. The Critical Need to Restore Input Tax Credit (ITC)

The most significant pain point highlighted by the FHRAI is the withdrawal of Input Tax Credit (ITC) on hotel rooms priced below a specific threshold.

The ITC Paradox

Currently, hotel accommodation attracts two primary GST rates:

1. 5% GST (Without ITC): For rooms with tariffs up to ₹7,500 per unit per day.
2. 18% GST (With Full ITC): For rooms with tariffs above ₹7,500 per unit per day.

While the reduction in GST to 5% for the mid-segment was intended to boost affordability for consumers, the simultaneous denial of ITC has had an adverse effect on businesses. Hotels in this critical mid-segment can no longer claim credit for the GST paid on major operational and capital inputs, such as:

ü  Rent and lease payments.

ü  Maintenance, repairs, and utilities.

ü  Capital expenditure on new construction or renovation.

This unrecoverable tax becomes a direct cost, leading to a cascading effect that inflates operational expenses and strains liquidity, disproportionately affecting mid-scale hotels.

FHRAI’s Solution:

ü  Restore ITC: The association has strongly recommended the restoration of ITC benefits even at the 5% GST rate to honor the foundational principle of a seamless credit chain under GST.

ü  Revision of Threshold: To align with current market realities, FHRAI proposed increasing the ₹7,500 tariff threshold to ₹12,500. This revision accounts for inflation and currency depreciation since the rates were first fixed in 2017, providing greater pricing flexibility, especially during peak tourist seasons.

ü  Reclassify Rooms: FHRAI also suggested considering hotel rooms as 'plant and machinery' for the purpose of ITC eligibility, providing a legislative mechanism for credit restoration.

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2. Delinking F&B GST Rates from Room Tariffs

The current GST framework creates an awkward and inefficient link between the tax rate for a hotel's F&B services (restaurants and coffee shops) and the room tariff of the hotel.

The Current Distortion

The tax rate for hotel-based restaurants is determined by the cost of the most expensive room:

ü  5% GST (Without ITC): Applies if the room tariff is below ₹7,500.

ü  18% GST (With Full ITC): Applies if the room tariff is ₹7,500 and above.

This linkage creates operational disparity and compliance headaches. It compels mid-segment hotels (which fall into the 5% slab) to adhere to the non-ITC structure for their restaurants, discouraging investments in hotel-based dining and limiting the flexibility to adjust room tariffs based on market demand.

FHRAI’s Proposal:

FHRAI has demanded that the GST rate for F&B services in hotels be completely delinked from the accommodation tariff. They proposed giving all hotel-based restaurants the flexibility to choose between:

ü  18% GST with full ITC, or

ü  5% GST without ITC.

A study by FHRAI suggests that by relaxing the current ₹7,500 constraint, hotels could dynamically adjust tariffs during high-demand periods, potentially increasing annual GST collections by over ₹4,000 crore.

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3. Seeking Amnesty for Legacy GST Disputes

Since the rollout of GST in 2017, the hospitality sector has faced numerous demand notices stemming from interpretational ambiguities, not tax evasion. Key areas of dispute include:

ü  Declared Tariff vs. Transaction Value: Confusion over whether GST should be calculated on the hotel’s internal 'declared tariff' or the actual 'transaction value' (the price paid by the customer).

ü  OTA Commission: Disputes arising from inflated room rates displayed by Online Travel Agencies (OTAs) that include commissions, even though the hotel only receives a lower amount that falls within the lower GST bracket.

FHRAI has urged the Finance Ministry to invoke Section 11A of the CGST Act, 2017 (introduced via the Finance (No. 2) Act, 2024), to implement a mechanism for the regularization or amnesty of these long-pending, disputed past GST dues. This move would provide a final resolution to unnecessary litigation and restore business confidence in the sector.

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A Step Towards Viksit Bharat @ 2047

In conclusion, the FHRAI's demands are not merely for concessions but for a fair and rational tax structure that supports India’s ambition to be a global tourism powerhouse. By implementing these key GST reforms—restoring ITC, delinking F&B rates, and resolving past disputes—the government can significantly simplify compliance, reduce litigation, and ensure that the hospitality sector becomes a major contributor to the goal of Viksit Bharat @ 2047.