India’s Goods and Services Tax (GST) has a big impact on the hospitality industry. Whether you run a tiny guesthouse or a large luxury hotel, the law changes how you handle monthly accounting. By staying up-to-date about current tax rates and possible available credits, you can reduce your tax liability and keep customers happy with lower prices.
Hotel Taxes Before GST
Before the Indian government instituted GST in July 2017, the hotel industry had to deal with extremely high taxes. In many states, you had to pay a range of different taxes, including VAT, luxury tax, and service tax. For some hotels, that pushed the tax as high as 30%. These high taxes caused many problems for hotels, such as higher prices, lower profits, and difficulty making upgrades, just to name a few. With multiple taxes, hotel owners also faced complicated paperwork when it came time to file tax returns.
How Is GST Different?
If you’re a hotel owner, the GST is designed to make your life easier. This system does away with all of the individual taxes and replaces it with one tax rate. Instead of charging your customers VAT and service tax, you can simply add GST to the bill. On the business side, the single tax also makes it easier to keep records and file taxes each month.
What Is the GST Rate for Hotels?
Under the GST law, there isn’t a flat tax rate for hotel rooms. Instead, the tax for hotel rooms is based on price. The price levels and corresponding GST rates are:
- Less than ₹1000: 0% GST
- ₹1000 – ₹2499: 12% GST
- ₹2500 – ₹7499: 18% GST
- ₹7500 and higher: 28% GST
If your hotel is on the upper end of the mid-range price scheme, this is good news. Originally, the 28% bracket included all hotels at ₹5000 and higher. The government changed the limits after it encountered resistance from the hotel industry. Budget hotels benefit from the GST, while the most high-end hotels are likely to see a price increase.
It’s not uncommon for hotels to use different room rates depending on the season, the day of the week, and the number of rooms that are unsold. If you’re pricing a room at ₹2400 on Thursday and ₹3000 on Friday, the tax rates will be different for each day. It’s important to set up your accounting system to add tax automatically based on the room price.
Declared Tariffs vs. Invoice Cost
Since the GST went live, the hotel industry in India has come across some confusion relating to room price. The law states that GST on hotel rooms is based on the “declared tariff,” or the rates you set for each room and provide to the government in advance.
But what happens when a customer books using a discount website like Booking.com? Imagine that you have a room priced at ₹8000, which would attract a 28% GST. A customer might find that room for ₹7400 on a third-party website and assume the GST would be 18% according to the rate slabs. But since you told the government the room cost ₹8000, you’d still need to charge 28% GST.
This discrepancy increases costs for customers, which causes problems for hotels. As a result, hotel industry associations in India have been calling for the government to set GST based on the invoice cost rather than the preset rates.
Using the Input Tax Credit
One of the biggest benefits of the GST is the input tax credit. When you buy supplies and services for your hotel, you pay GST. With the ITC, you can subtract the taxes that you paid from your GST liability. So if you paid ₹1000 in GST, and you owe ₹1500, your final tax bill is only ₹500. Since your hotel probably spends a great deal of money on everything from laundry services to new bedding, the ITC can go a long way toward reducing your tax bill.
What About Hotel Restaurants?
For hotels with restaurants, the GST rules change slightly. If your hotel is starred, and your rates are ₹7500 and higher, you must charge restaurant customers a GST of 18%. If your hotel does not meet both of these conditions, you can charge hotel restaurant customers a GST of 5%, which means your guests’ food bills will be lower.
Your hotel restaurant’s tax rate also affects whether you can claim the ITC. If you fall into the 18% bracket, you are allowed to use the ITC for all of the goods you purchase to use in your restaurant. That provides some relief for luxury hotels, which have been hit the hardest by GST. It’s also good news for your diners, because you can pass on the savings through lower prices. If your hotel restaurant falls into the 5% bracket, you cannot claim ITC. These new rules were announced in February 2018.
For many hotel owners, the GST is largely positive. As businesses and the government adjust to the new tax regime, it’s a good idea to keep an eye on tax rates and credits to ensure you’re getting the biggest possible benefit.