Applicability of GST on Hostel/Lodging Services

LEGAL FRAMEWORK

1. EXEMPTION NOTIFICATION No. 12/2017 CTR Entry No. 12: This entry exempts services by way of renting residential dwellings for use as residences from GST. According to this, the charges collected from hostel inmates for accommodation should be exempt from GST as they qualify as residential dwellings.

2. RATE NOTIFICATION No. 11/2017 CTR Entry No. 7: This entry imposes a 12% GST on hotel accommodation services if the unit's value of accommodation is less than or equal to Rs. 7,500 per day.

3. CIRCULAR NO. 32/06/2018-GST: Contrary to Entry No. 12 of NN 12/2017, this circular categorized hostel services provided by the Trust as akin to commercial accommodations like hotels and motels, potentially subjecting them to GST under Entry 7 of NN 11/2017, even for charges below Rs. 1,000.

JUDICIAL DECISIONS

HOSTEL SERVICES FOR STUDENTS FALLS WITHIN THE RESIDENTIAL DWELLING

1. KARNATAKA HIGH COURT | TAGHAR VASUDEV AMBRISH | 2022 (2) TMI 780 DTD 07‐02‐2022

Held that hostels are used by students for the purpose of residence and also for a longer duration terming the stay in hostel as for residential purpose. Held that, such service will fall within the purview of residential dwelling and not liable to GST.

2. MADRAS HIGH COURT | THAI MOOKAMBIKAA LADIES HOSTEL | 2024 (3) TMI 1271 DTD 22-03-2024

This judgment reiterated that hostel services provided to girl students and working women qualify as residential dwellings, thus exempting them from GST as per entry 12 of Notification No. 12/2017.

FREQUESTNLY ASKED QUESTIONS

1. What is the change in GST rate for Hotel Accommodation Services?

Ans: The 47th GST Council has removed the exemption on accommodation services having value of supply lesser than Rs. 1,000 per unit/per day or equivalent. The change & its related impact on eligibility of ITC is explained below:

2. What nature of services are covered under Hotel Accommodation services?

Ans: Since the tax rate for Hotel Accommodations of value below Rs. 1,000/- is changed and the same is now liable to tax @ 12%, hence it is important to understand the meaning of the term 'Hotel Accommodation'.

As per Notification No. 11/2017-Central Tax (Rate) as amended, the term 'Hotel accommodation' is defined as under: "Hotel Accommodation means supply, by way of accommodation in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes including the supply of time share usage rights by way of accommodation."

Further, Education Guide issued under the service tax by CBEC states that hotel, motel, inn, guest house, campsite, lodge, houseboat, or like places are generally meant for temporary stay.

3. Whether Hotel tariffs below Rs. 1,000/- would become costlier by 12%?

Ans: Although the rate of tax has increased, however the impact need not lead to increase in price by 12% as the Hotels would now be eligible to claim Input tax credit on various goods/ services procured by them. Earlier, this was leading to cost as the budget hotels were either unregistered or they were proportionately reversing the input tax credits to the extent of turnover comprising of room below Rs 1,000/-.

Further, the impact of price rise would be only on unregistered persons who cannot claim the ITC. Also, Hotels need to be vary of the Anti-Profiteering provisions that restricts one to profiteer from the pricing on account of taxes so that there are no consumer complaints or grievances. Even a compliant from a single consumer towards antiprofiteering can open a big pandora box of dispute. Hence, it is advised that the increase in prices is properly aligned basis the provisions of anti-profiteering laid out in section 171 of the CGST act.

Further, Generally the pricing in this industry is largely governed by the market forces and the customer pay capacity and therefore a proper analysis of the market conditions must be done to arrive at the right pricing that does not impact the sales negatively.

4. Whether the small lodges, Inns, hostels etc. need to take registration under GST if their aggregate turnover exceeds Rs. 20 lakhs?

Ans: Many small lodges, inns, hostels etc. having room accommodations below Rs. 1,000/- were claiming the benefit of this exemption and were not registered under GST. Most of them would now come under the tax net. Therefore, if the aggregate turnover in a financial year exceeds Rs. 20 lakhs, then they need to obtain registration under GST.

5. In case where a small lodge provide food along with the accommodation, what shall be the impact of change in the rate of tax?

Ans: In case where a hotel, lodge provide food in complimentary to the accommodation, then the food element also would be liable to the tax rate @ 12%. However, if the food portion is unbundled, then the tax rate for the same would be governed by the rate of tax as applicable for such service i.e., 5% without ITC.

Further, it is pertinent to note that the concessional tax rate of 5% (without ITC) is prescribed for the restaurant services which interalia means that the Hotels need to identify the common goods/ services that are used for both hotel accommodation service and the food portion and ITC needs to proportionately be reversed on the same.

6. What is the meaning of the term "Residential dwelling"?

Ans: The term "Residential dwelling" is not defined under the GST law or the erstwhile Service tax law. However, Education Guide issued by CBEC under the erstwhile service tax regime states that in the absence of definition in the law the same needs to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, campsite, lodge, houseboat, or like places meant for temporary stay.

The general dictionary meaning of the term 'Residential dwelling' means "Living in a certain place permanently or for a considerable length of time". From the above, one can gauge that the structure of dwelling (i.e., the way it is designed - the layout of the dwelling) and the intent of its use are of paramount importance to determine whether or not the premises is a residential dwelling.

7. How to determine whether the particular premises is used as a 'residence' or as an accommodation service?

Ans: In order to understand whether the premises is used as a 'residence' or as an 'accommodation service', one needs to understand the meaning of the term 'residence'.

The term 'Residence' is not defined under the GST law. Going by the general parlance, 'Residence' is a place in which a person lives or resides. In other words, if a person resides at a particular place as a place of his abode, then it would amount to his or her residence.

This interalia means that a place for temporary stay cannot be said to be used as a residence, it can at the most be an accommodation or lodging for some period of time but cannot be said to be ones residence. Cue in this regard can be taken from the erstwhile service tax law wherein, section 65(105) of the Finance Act, 1994 (prior to 2012), provides the definition of taxable service for services provided by hotels, inns, etc, which generally involves stay for shorter period as compared to permanent or considerable time of stay, provides that the said service is providing accommodation for a continuous period of less than 3 months.

A guidance or benchmarking of 3 months can be taken from the above. Taking cue from above, it can be stated that the intention of the law is to provide exemption in cases where the main intention of taking the premises on lease or rent is for a long-term stay.

The same view is also in line with the view taken by Karnataka High Court in the case of Taghar Vasudev Ambrish 2022-TIOL-242- HC-KAR-GST. However, the 3 months criteria cannot be a touchstone criterion for all the situations under GST as there is no such specific mention of 3 months criteria under GST law as against the express provisions under the Service tax laws. Therefore, one needs to factor out various business dynamics, the way contracts are structured, the privity of contract etc. to determine whether the premises is used as a residence or is merely an accommodation service.

In view of authors, this is very important aspect as based on this determination, the rate of tax could vary from 0% or 12% or 18%.

8. Whether Student Hostels/ Paying guest services provided to students qualifies as accommodation service or rental services?

Ans: Circular No. 32/06/2018-GST considers hostel services to be part of accommodation services i.e., at par with hotels, inn, motels, etc.

However, Karnataka High Court's judgement in the Taghar Vasudev Ambrish 2022-TIOL-242-HC-KAR-GST contradicts the said contention wherein it was held that hostels are used by students for the purpose of residence and also for a longer duration terming the stay in hostel as for residential purpose. It is to be noted that there cannot be a one size fits formula and a standard benchmarking in these cases. For instance, there can be situations where the hostel stays are also accepted for shorter periods i.e., say for a fortnight or where the educational course being undertaken itself is a short term.

Further, in a same hostel there can be students staying for long term and also short term. Few important parameters to be considered in this regard are as under:

a) The privity of contract and the nature of arrangement between the service provider and the user of property.

b) Apart from the room/ bed charges, what are the other facilities & amenities being offered.

c) Period of stay, whether the same is meant for short/ temporary stay or long term.

Hence, it is important that the facts and circumstances of each case are properly studied, the crux of the transaction is understood and most importantly the nature of arrangement between the parties i.e., privity of contract is clearly laid out and basis these factors, an appropriate decision must be taken as to whether the hostel is in the nature of the accommodation service or a rental arrangement. This differentiation is important as the taxability, person who must pay tax and also the tax rate would change based on the above assertions.

9. Company A provides Hostel services to students, whether GST is applicable on the same?

Ans: As discussed above, if the hostel is meant for short-term stay with various facilities such as catering, Wi-Fi, laundry etc., then the service would be leviable to tax @ 12%. However, if the arrangement in the hostel service is more in the nature of long term stay with privity of rental arrangement, then the said service would be exempt from tax (assuming students are not registered under GST).

10. Company A provides Hostel services to the university/ educational institution, whether GST is applicable on the same?

Ans: Generally, in the case of transaction with universities/ educational institutions, the arrangement would be in the nature of rental services wherein a leave and license or a lease deed is executed for a longer term which ranges from 3 years and above. Therefore, the arrangement in these cases would generally be in the nature of renting.

Further, the students staying in these hostels also reside in the hostels for a longer period of time till the completion of the course i.e., 1 year and up to 5 years. Also, the charge in this case would not be per student based, instead a lumpsum monthly amount would be charged from the university. Hence, as the premises is in the nature of a residential dwelling and it is also used for the residential purpose, therefore the transaction would be exempt from tax net.

However, if the said university/ educational institution is registered under GST, then the said university/ educational institution needs to be pay tax under reverse charge mechanism @ 18%.

11. University being an educational institution provides hostel services to its students, what is the GST implication on the same?

Ans: Services provided by university being an educational institution to its students are exempted from GST as they are imparted based on the curriculum and it leads to qualification in the form of a degree, diploma etc. Many educational institutions also provide the hostel facility to its students and a separate fee is charged for the said Hostel facilities provided.

It is pertinent to note that as per entry 66 of the Notification No. 12/2017-Central Tax (Rate) services provided by the educational institutions to its students are exempted from the tax net and hence even the hostel facility would be exempted. More so, the facility is an element of a natural bundle to the educational service and hence once the principal supply is exempt, the ancillary items also must not be liable to tax.

12. M/s. ABC is a commercial coaching centre which provides the hostel facility to its students as a part of its coaching classes, what is the GST implication on the same?

Ans: Commercial training and coaching services provided by the commercial coaching centres are not covered under exemption from GST liability and generally taxable @ 18%. The exemption discussed above would not be applicable to these commercial coaching centres.

Hence, if the hostel facility is bundled with the coaching service then the tax rate of 18% would be applicable even on the fees collected towards the hostel facility. However, if the hostel facility is independently provided without bundling it with the main service (i.e., commercial coaching), then the said service would be liable to tax @ 12% as an accommodation service.

However, if the hostel facility is provided for a long term stay and the privity of contract is that of a renting of residential dwelling, then the same would be exempted from the tax net (assuming that the students are not registered under GST).

13. Mr. A (unregistered under GST) provide hostel services to the students by directly collecting the charges from the students. The premises is taken on rent from the landlords. What is the GST implication in the hands of landlord?

Ans: In the case of transaction between landlord and Mr A., the transaction is in the nature of renting of residential dwelling used for residence. Reliance in this regard can be placed on the decision in the case of Taghar Vasudeva Ambrish Vs Appellate Authority for Advance Ruling Karnataka 2022-TIOL-242-HCKAR-GST wherein it is held that Hostels are primarily given on rent for residential use and is not at par with hotels.

Hon'ble High Court also concluded that the benefit of exemption notification cannot be denied to the petitioner on the ground that the lessee is not using the premises and that the premises is registered as a commercial unit under the shops and establishments act. Therefore, there will not be any GST implication in the hands of landlord.

14. In the above case, what is the GST implication in the hands of Mr. A?

Ans: As far as Mr. A is concerned, if he is registered under GST, then it shall be liable to tax under RCM on services availed from landlord and may not be entitled to take the ITC of the same if onward services to students are exempted being in the nature of renting services (assuming students are not registered under GST).

However, if the onward service to students is in the nature of accommodation service, then the same would be liable to GST @ 12% and the tax paid under RCM would be available as input tax credit.

NEW ENTRY IMPLICATIONS AND INTENTIONS

DURING 53RD GST COUNCIL MEETING ON 22-06-2024

A notable decision made by the GST Council was to exempt hostel accommodation services valued up to ₹20,000 per month from GST. This move is expected to provide substantial relief to students and individuals residing in hostels, reducing their financial burden associated with indirect taxes.

It is recommended to create a separate entry in notification No. 12/2017- CTR 28.06.2017 under heading 9963 to exempt accommodation services having value of supply of accommodation up to Rs. 20,000/- per month per person subject to the condition that the accommodation service is supplied for a minimum continuous period of 90 days. To extend similar benefit for past cases.

PLEASE NOTE: for exemption from applicability of GST the services must be;

1. Of value less than Rs. 20,000/- per month;

2. The period of supply of such service should not be less than 90 days.

DISCLAIMER: The article presented here is only for sharing information with readers. The views expressed are of a personal nature, shall not be considered as professional advice. In case of necessity, do consult with professionals.