Clarification on ITC Eligibility, Effective GST Burden & RCM for Hotels under 5% GST Scheme

ITC / Input 4597 views 2 replies

Vaibhav Sharma

Founder

26 Points Posted on 22 September 2025

Hello everyone,

We work with multiple hotel clients across India, and we are looking for clarity on the recent GST amendment effective 22nd September 2025.

As per the new provision, hotel accommodation services where the room tariff is below ₹7,500/day are taxed at 5% GST without ITC.

Our clients are concerned about the impact on input tax credit (ITC), especially on RCM for rent and other operating expenses. Here’s an illustrative example to show the issue:

Rent paid to landlord: ₹25,00,000/month (18% RCM – Unregistered owner of multiple hotel units)
Room revenue: ₹25,00,000/month (5% GST, no ITC, tariff < ₹7,500/day)

Resulting GST impact:

GST collected from guests: ₹1,25,000
RCM GST paid on rent: ₹4,50,000 (cannot claim ITC)
Net effective GST burden: ₹3,25,000/month (~13% of revenue)

This is much higher than the earlier 12% with ITC scheme, where hotels could set off ITC on rent and inputs.

Our queries to the forum:

Is there any provision under current GST law to claim ITC on RCM for rent and other inputs when hotels are under the 5% scheme?
Can hotels voluntarily opt to charge a higher rate (12%/18%) on rooms < ₹7,500 to avail ITC?
If not, is there any way to pay RCM on rent/inputs at a reduced rate (5% or 12%) instead of 18%?
Are there recommended steps or clarifications for mid-tier hotels to manage this increased tax burden?

We’d appreciate any guidance or references to official clarifications. This will help hotels plan operations and stay compliant under the new structure.

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9615 Points Posted on 23 September 2025

Paying RCM at a reduced rate: There is no provision to pay RCM on rent/inputs at a reduced rate (5% or 12%) instead of 18%if the hotel is under he 5% scheme. RCM is applicable as per prescribed rates.

Managing increased tax burden for mid-tier hotels: Mid-tirer htels under the 5% schee need to manage costs considereing restricted ITC. Steps include:

Reviewing input costs and optimizing expenses,

Ensuring compliance with GST rules for the 5% scheme.

Considering impact on pricing and profitability. see for fresh circulars in ortal gst.gov.in

Tax Garden

Tax Consultant

840 Points Posted on 15 June 2026

Hotels under the 5% GST scheme (room tariff Rs 1,001 to Rs 7,500 per day) cannot claim ITC on inputs. This is a blocked credit under the rate notification itself, not a Section 17(5) restriction.

Here is how ITC and RCM work in practice:

ITC FOR THE HOTEL (SUPPLIER):
The hotel cannot claim ITC on goods and services procured if it supplies accommodation at 5%. The notification is an absolute bar on ITC at the supplier level for this rate tier.

ITC FOR THE CORPORATE GUEST (RECIPIENT):
The recipient company also cannot claim ITC on a hotel invoice at 5%. The notification blocks ITC at the recipient end too, making 5% a net cost regardless of the guest business use.

EXCEPTION: If the hotel charges 18% (rooms above Rs 7,500 per day, or a hotel that has declared itself as Specified Premises via the GSTN portal), then:
- Hotel can claim ITC on inputs
- Corporate recipient can claim ITC subject to normal Section 17(5)(b) restrictions

RCM APPLICABILITY:
RCM does NOT apply on hotel accommodation when the hotel is a registered GST supplier and charges GST on forward charge. RCM applies only to supplies specifically notified under Section 9(3) or 9(4). Hotel accommodation is not on that list when the supplier is registered.

EFFECTIVE BURDEN CALCULATION:
At 5%, ITC is fully blocked at both ends. A company booking a room at Rs 5,000 per night pays Rs 250 GST which is a pure cost with no recovery.

GST 2.0 SPECIFIED PREMISES OPTION:
Hotels with any room priced above Rs 7,500 can opt in as Specified Premises via the GSTN portal. This shifts the entire property to the 18% bracket with ITC available. Hotels with a majority of business guests may benefit from this opt-in despite the higher headline rate.

For the complete rate structure (0%, 5%, 18%) and the Specified Premises declaration rules, this [GST on hotel accommodation rates guide](https://taxgarden.in/blog/gst-on-hotel-accommodation-services-india-rates-2026) has each tier with the relevant notification references.