Are Hotels Overpaying Taxes?

Khush Trivedi | Last updated: 16 April 2024

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Quick Summary

The Indian hotel industry, a significant contributor to the economy, faced complex tax structures before the Goods and Services Tax (GST). Previously, hotels paid various municipal taxes like VAT, luxury tax, and service tax, often leading to a cascading effect where consumers paid tax on tax. The introduction of GST aimed to simplify this by offering uniform tax rates and enabling input tax credit, which reduces the final cost for consumers and potentially boosts tourism. However, disparities in GST rates between star hotels and smaller establishments remain a point of discussion.

Introduction

As we all are aware Hotel Industry is one of the dominating Industries in India Having Market size(2024) of 247.31 Billion USD & which will be around 475.37 Billion USD by 2029 with CAGR of 13.96%. Pre-GST Hotel industry need to pay municipal taxes (VAT, luxury tax, and service tax) under the previous VAT regime. As a focus on the disparity between the 18% GST in star hotels and the 5% GST in smaller restaurants. As under the hotel where the room tariff exceeded Rs.1,000, was liable for service tax at 15% But due to cascading effects of 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.

Hotel Taxes in India: Are They Overpaying

Hotel Industries under Goods & Service Tax

As Currently a debate on social media platforms has sparked a heated discussion about the application of GST rates in restaurants, with a particular Goods & Service Tax benefits of uniform tax rates, and easy and better utilization of input tax credit. As the final cost toregime Hotel industries has got the end user decreases, the industry attracts more overseas tourists than before.

This ideally results in many pros which could help the industry growth in long run. Lets look at the GST rates Based on room tariff.

Room Rent per day	18-07-22 On wards	01-10-2019 to 17-07-2022	01-07-2017 to 30-09-2019
< Rs. 1,000	12%	EXEMPT	EXEMPT
Rs. 1,001 to Rs. 2,500	12%	12%	12%
Rs. 2,501 to Rs. 5,000	12%	12%	18%
Rs. 5,001 to Rs. 7,500	12%	12%	18%
> Rs. 7,500	18%	18%	28%

Impact of GST on Hospitality Industry

As whether the rates are fair? Compare to taxes before GST let’s talk about some of the pros & cons of implementation of GST on said industry

PROS

Ease of Administration: As a reduction in administrative processes and additional opportunities to simplify the taxation process will result from the elimination of various other taxes by the GST
Clarity to customers: As it is difficult to tell the difference between VAT & Service Tax to the customer as he can see only one tax charged on the purchase
Input Tax Credit: Availability of Input Tax credit will reduce the cascading effects of pre GST taxes which will decrease the end user cost.

CONS

Increased Tech Burden: Under GST specific rules about how each industry must manage its accounts and file returns, but it will force businesses to become tech-savvy, increasing compliance costs and technological burdens
Fairness of tax System: Disparity between the 18% GST in star hotels and the 5% GST in smaller restaurants will have perceived burden on middle class