In 2023, the direct contribution of the tourism and hospitality industry to India’s GDP was over 231 billion U.S. dollars. The market size is estimated at USD 247.31 billion in 2024 and is expected to reach USD 475.37 billion by 2029. International tourist arrivals are projected to reach 30.5 million by 2028. According to the World Travel and Tourism Council, over the next decade, India’s travel and tourism GDP is expected to grow at an average of 7.1 percent annually.
Hotel Sector
Revenue Streams of the Hotel Industry
Hotels derive income through various services. Accommodation services include room tariffs, additional bed charges, early check-in charges, and late check-out charges. Food and beverage income includes dine-in at the restaurant, in-room dining and minibar services, takeaway or delivery of food, outdoor catering, and the sale of cocktails or liquor. Miscellaneous income includes spa and fitness centers, banquet halls or business centers, laundry services, events such as New Year’s Eve or Sunday brunches, and transport facilities.
Journey So Far
Before the GST regime, the applicable service tax on room stays was 9 percent after abatement. States also levied a luxury charge based on the declared tariff. Between 1 July 2017 and 26 July 2018, the GST rate was based on slabs of the declared tariff. From 27 July 2018, the rate was based on the actual transaction value. The rate structure was as follows:
- Up to INR 999: Exempt
- INR 1000 to 2499: 12 percent
- INR 2500 to 7499: 18 percent
- INR 7500 and above: 28 percent
Effective from 1 October 2019, based on actual transaction value:
- Up to INR 1000: Exempt
- INR 1001 to 7500: 12 percent
- More than INR 7500: 18 percent
Effective from 18 July 2022, the rate was further simplified:
- Up to INR 7500: 12 percent
- More than INR 7500: 18 percent
Input Tax Credit became available under the GST regime, unlike in the previous tax framework. In July 2018, the industry experienced significant relief when the mechanism for determining tax rates changed from declared tariffs to actual transaction values. Multiple changes to the rate structure have occurred since then.
Illustration of Tax Rates Across Periods
Consider a scenario where the declared tariff is INR 8000, and the actual room tariff charged is INR 7000. Under the pre-GST regime, there was a 10 percent luxury tax and a 9 percent service tax on 60 percent of the room value. The total bill amounted to INR 8330. Under the GST regime before July 2018, GST was levied at 28 percent on the actual value, resulting in a bill of INR 8960. Between July 2018 and September 2019, GST was 18 percent, resulting in a bill of INR 8260. Post-October 2019, GST was 12 percent, bringing the total bill to INR 7840. Input Tax Credit was not allowed in the pre-GST regime,, but became available under GST.
Determining the declared tariff was challenging due to dynamic and demand-based pricing strategies. There was no legal requirement for hotels to publish their declared tariff, unlike under the luxury tax regime. During assessments or investigations for the period before July 2018, hotels faced difficulty in substantiating the correctness of the GST rate applied.
Issues in Hotel Accommodation Services
Taxability Related to Classification and Value
Questions arise regarding the tax implications of services such as breakfast, lunch, dinner, spa facilities, and pick-and-drop arrangements provided along with accommodation. The classification could fall under composite supply, mixed supply, or be treated as individual supply. The classification directly impacts the applicable GST rate and tax treatment.
Influence of Pricing Strategies on Tax Outcomes
The hotel’s sales team determines room tariffs and communicates them to the e-commerce operator. Often, the tariff is inclusive of GST. For instance, if a room is priced between INR 8400 and INR 8851 inclusive of tax, the applicable GST rate may vary between 12 percent and 18 percent depending on how the base value is computed. This could cause pricing mismatches and compliance issues. Sales teams must be trained to avoid complications arising from inclusive pricing strategies.
Taxability of Early Check-in and Late Check-out Charges
For early check-in charges of INR 500 and a booking that includes a room at INR 7200 on Day 1 and INR 7900 on Day 2, the applicable GST rates differ. Late check-out charges of INR 950 pose similar classification issues. Several views exist: these charges could be proportionately taxed based on each day’s rate, tagged to the first or last day, or taxed at the highest applicable rate. Additionally, some argue it could be treated as a standalone supply of time-share usage rights, raising questions about whether such services were exempt before July 2022.
Practical concerns include determining if these charges should be combined with the preceding or succeeding day’s tariff, whether they qualify as time-share services, and how they affect the overall value of the supply. In multi-day bookings with different GST rates, identifying the applicable rate for these charges adds complexity.
Impact of Declared Tariff on GST Rate
For instance, when the declared tariff across three days is INR 7000, INR 8000, and INR 7200, respectively, restaurant services provided on these days may attract GST at different rates. As per Notification 20/2019 dated 30 September 2019, restaurant services outside specified premises attract GST at 5 percent without ITC, while those within specified premises are taxed at 18 percent with ITC.
Declared tariff is defined to include all amenities provided in the accommodation unit, without considering discounts. Specified premises are those where any unit of accommodation has a declared tariff above INR 7500 per day. When tariffs vary daily, questions arise regarding whether GST rates and ITC eligibility should change accordingly. This creates practical compliance challenges under Sections 18(1), 18(4), and Rules 40 and 44 of the CGST Rules concerning ITC availment and reversal when supplies shift between taxable and exempt status.
GST on No-show and Cancellation Charges
Two scenarios are commonly encountered. In the first, the customer pays a non-refundable advance and does not show up or provide prior cancellation notice. In the second, the customer cancels in advance and is charged a cancellation fee either as a lump sum or a percentage of the room tariff. According to Circular No. 178/10/2022-GST, cancellation fees compensate for costs incurred in preparing for or canceling the service, and therefore, they should attract GST at the same rate as the original service.
Uncertainties remain about whether these amounts are taxable under hotel services (HSN 9963), as consideration for tolerating an act (HSN 9997), or another classification entirely. The applicable rate is also debated. Notable case law includes M/s Lemon Tree Hotel vs Commissioner and M/s EIH Ltd. vs Commissioner of CGST, Mumbai, which shed light on the taxability of such charges.
GST on Airport Lounge Services
Airport lounges offer a range of services. Comfortable seating and recliners, Wi-Fi and charging stations, business centers, and entertainment options typically attract GST at 18 percent. Complimentary food and drinks provided in the lounge attract GST at 5 percent. Private showers and restrooms may be exempt. The mixed nature of services offered in lounges necessitates careful classification to determine the applicable tax rate.
Further Taxability Issues in Hotel Accommodation Services
Bulk Room Bookings and Classification Disputes
When hotel rooms are purchased in bulk by a tour operator and then sold to individual customers, a classification issue arises. Should these be considered as hotel accommodation services (HSN 996311) or as tour operator services (HSN 998552)? Various advance rulings have offered conflicting opinions. The correct classification affects not only the applicable GST rate but also the eligibility of input tax credit, invoicing structure, and reporting obligations under GST returns.
Events and Conferences at Hotels
Hotels often host conferences and corporate events where charges are levied on a per-plate basis. The classification of such transactions must distinguish between mere catering and a composite supply involving event management, hall rental, and other bundled services. In such cases, determining whether the entire supply should be taxed as a catering service at 5 percent without ITC or as an event service at 18 percent with ITC becomes crucial for tax compliance.
Input Tax Credit on Construction of Hotels
The eligibility of ITC on goods and services used in constructing a hotel has been a point of significant contention. The law disallows ITC on works contract services for the construction of immovable property, except where such input services are used for further supply of works contract services. Hotel operators have contested that since the hotel business involvesan ongoing supply of services, the restriction should not apply. This matter remains pending before the Supreme Court, and the outcome will have far-reaching implications for the industry.
Brand Usage Between Head Office and Branches
When a brand is owned by the head office and is used by branch offices or franchisees located in other states, the question arises whether the use of such a brand constitutes a taxable supply. Under GST law, distinct persons are recognized across different states even if they are part of the same legal entity. The cross-charge of brand usage and royalty fees must be carefully structured to ensure compliance. This also impacts ITC eligibility and valuation under Rule 28 of the CGST Rules.
Loyalty Programs
Many hotels offer loyalty programs that reward customers with points redeemable against future bookings. When these points are redeemed, the hotel may offer a service at a discounted or even zero consideration. The GST implications depend on whether the redemption is considered a separate supply, part of the original supply, or a discount. Valuation rules must be applied, and tax liability may arise even when no additional payment is made at the time of redemption.
GST on the Food and Beverage Sector
Evolution of GST Rates on Restaurants
Initially, non-AC restaurants were taxed at 12 percent, while AC restaurants and those serving liquor were taxed at 18 percent. Outdoor catering attracted 18 percent with ITC. Post 15 November 2017, a major rate revision occurred. Restaurants not located in hotels charging a room tariff above INR 7500 were taxed at 5 percent without ITC. Restaurants within such hotels were taxed at 18 percent with ITC. On 1 October 2019, further rationalization led to bifurcation based on whether the restaurant was located in specified premises.
Classification Under Schedule II
Entry 6(b) of Schedule II treats the supply of food or any article for human consumption or drink as part of a service. This holds whether the food is consumed on-premise or delivered. The classification of restaurant service is thus not limited to dining in but includes takeaway and room service. The rate and ITC availability depend on the nature of the premises and the classification adopted.
Taxability of Cloud Kitchens
Services Offered by Restaurants
Restaurants typically provide not just food but a set of services that include air-conditioning, trained staff, crockery, cutlery, and ambiance. These services justify treating the offering as a composite service and taxing it under restaurant services at 5 percent or 18 percent, depending on the premises.
Cloud Kitchens
Cloud kitchens, by contrast, provide food without any dining facility. Initially, there was a debate about whether they should be taxed as a supply of goods or services. However, clarification via Circular No. 164/20/2021-GST and High Court rulings confirmed that cloud kitchens, takeaway services, and food delivery constitute restaurant services and are taxable accordingly. The clarification helped resolve confusion regarding GST applicability on food delivery apps and aggregator platforms.
Classification of Pre-Packaged Consumables
Supplies Within Restaurants or Takeaway Counters
Pre-packaged consumables such as namkeens, sweets, and chocolates may be sold from within a restaurant or takeaway counter. The key issue is whether such supply is a supply of goods or a restaurant service. Judicial precedents like the one from the Uttarakhand Authority for Advance Ruling and the Gujarat High Court suggest that the intention of the parties, the manner of supply, and the presence or absence of accompanying services influence the tax treatment.
For example, if biryani is sold along with a cold drink for takeaway, the applicable GST rates could be 5 percent for food and 28 percent plus 12 percent for the cold drink. Where the supply of items involves service elements like packaging, branding, or promotional schemes, it may fall under the classification of restaurant service.
GST on Trademark Usage
Trademark usage within hotel and restaurant chains poses unique challenges. If the head office owns the trademark and allows state-level branches or franchisees to use it, the supply of this intangible right may be considered a service under GST law. Even if the trademark is registered nationally and not specific to a state, GST law recognizes distinct persons for registration across states. Therefore, intra-company transactions involving brand rights may attract GST and require proper invoicing.
Transactions Between Central Kitchen and Delivery Kitchen
Central kitchens may supply cooked food or raw ingredients to delivery kitchens or franchise outlets. The classification of such transactions as goods or services affects tax rates. If treated as a supply of goods, GST rates ranging from 0 percent to 18 percent may apply with ITC. If classified as restaurant services, the transaction may attract GST at 5 percent without ITC. For multi-state restaurant chains, the correct classification and structuring of transactions is vital to avoid tax leakage.
Discounts Through Aggregator Platforms
Restaurants often partner with digital platforms like Dineout or Zomato Gold to offer discounts. The issue arises when a discount borne by the restaurant is offered post-invoice. For example, if an invoice is raised for INR 1260 including GST, and a 25 percent discount is provided, resulting in actual payment of INR 945, the GST already charged may not reflect the final consideration.
This creates difficulties in compliance, especially when discounts are not reflected on the invoice. The restaurant must decide whether to issue a credit note or adjust future invoices. Inaccurate reporting can result in mismatches in GSTR-1 and GSTR-3B, leading to compliance scrutiny.
Bakery Supplies and Classification
The classification of bakery supplies as goods or services depends on the mode of delivery and nature of the outlet. If cakes, pastries, and biscuits are sold over the counter without any service component, they are treated as goods taxable at 18 percent with ITC. If supplied as part of restaurant service, such as a dine-in or combo meal, they may attract 5 percent GST without ITC. Accurate classification is essential to avoid disputes during audits.
GST on Packaging Charges for E-commerce Orders
Packaging charges applied on food deliveries via e-commerce platforms create an issue of taxability. If a customer orders food for INR 500 and the restaurant levies INR 40 for packaging, GST should be charged on the total INR 540. The applicable rate is usually 5 percent for restaurant services. However, confusion may arise about who is liable to pay GST on the packaging charges — the restaurant or the e-commerce operator.
According to Section 9(5) of the CGST Act and Notification 17/2017, the operator is liable for the supply of restaurant services via the platform. However, packaging charges are often considered incidental to the supply of food and should be taxed similarly.
GST Treatment for Hotel Aggregators and Online Travel Agents
Online travel agents (OTAs) and hotel aggregators have transformed the way hotel rooms are booked in India. These intermediaries provide a digital platform where users can browse, compare, and reserve accommodation across various locations. However, the introduction of GST has created specific compliance and tax liability requirements for these entities. The treatment of GST in the hands of OTAs depends on the nature of the transaction and whether they are acting as an agent or principal. When an OTA is merely facilitating the booking on behalf of the hotel and earning a commission, GST is applicable on the commission income earned by the OTA at the rate of 18%. In this case, the hotel remains liable to charge and deposit GST on the accommodation services directly provided to the customer. On the other hand, if the OTA is acting as the principal (for example, by acquiring the inventory from the hotel and then selling it to the customer), the OTA is liable to pay GST on the entire value of the supply of accommodation services. In such cases, the OTA must charge GST from the customer based on the applicable slab determined by the declared tariff of the accommodation service provided.
The distinction between principal and agent plays a critical role in deciding who bears the tax liability and how the invoicing should be done. In the case of aggregator platforms like MakeMyTrip, Yatra, and Goibibo, which commonly act as agents, it is the hotel that issues the tax invoice to the guest, while the OTA issues a separate invoice to the hotel for their commission, both charging GST separately. These platforms must also ensure that their services are classified correctly under SAC code 998599, which relates to other support services. From a compliance standpoint, OTAs are required to register under GST in all states where they provide taxable services, even though the place of supply might vary. The input tax credit (ITC) on expenses incurred by OTAs, such as digital advertising, payment gateway fees, and backend services, is generally allowed, provided these inputs are used in the course or furtherance of business and are not blocked under Section 17(5) of the CGST Act.
Reverse Charge Mechanism in Hotel Accommodation Services
Under GST law, the reverse charge mechanism (RCM) is a system where the recipient of the service, rather than the supplier, is liable to pay the tax. In the context of hotel accommodation services, RCM is applicable in specific scenarios, especially when the supplier is an unregistered entity and the recipient is registered under GST. One prominent instance is when a registered business entity avails accommodation services from an unregistered hotel or guest house. In this case, the recipient must pay GST under RCM on the applicable rate as per the declared tariff. However, the scope of this provision has been narrowed over time.
As per Notification No. 17/2017-Central Tax (Rate) dated 28th June 2017 and subsequent amendments, services by way of accommodation in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes supplied by unregistered suppliers to registered persons were earlier covered under RCM. However, with effect from 1st October 2019, the GST Council recommended the withdrawal of this specific RCM obligation to ease compliance for businesses and promote ease of doing business in the hospitality sector.
Despite the rollback, RCM may still apply in other contexts. For example, if a company receives accommodation services through a travel agent who is not registered under GST, and the travel agent acts as a principal, RCM could become applicable. Businesses must assess the contractual arrangement, GST registration status of suppliers, and the exact nature of supply to determine whether RCM applies. It is also essential to issue a self-invoice in cases where RCM is applicable and pay the applicable GST using the cash ledger. Input tax credit for tax paid under RCM is allowed if the accommodation services are used in the course or furtherance of business, subject to the eligibility criteria under the CGST rules.
GST Compliance Requirements for Hotels and Lodging Providers
Hotels and lodging establishments providing taxable accommodation services must adhere to several compliance obligations under the GST framework. The first and foremost requirement is GST registration. Any hotel or guest house whose aggregate turnover exceeds the prescribed threshold limit—Rs. 20 lakhs in most states and Rs. 10 lakhs in special category states—is mandatorily required to register under GST. Once registered, these establishments must issue tax invoices for all taxable supplies made to customers. The invoice must contain mandatory fields, including the name and address of the hotel, GSTIN, HSN/SAC code (typically 9963 for accommodation services), rate of tax, taxable value, and the amount of GST charged.
Hotels are also required to file monthly or quarterly returns, depending on their turnover and opted return scheme. GSTR-1 (details of outward supplies), GSTR-3B (summary return with payment of tax), and annual returns like GSTR-9 are part of the ongoing compliance routine. Invoices must be maintained systematically, and records should be preserved for at least six years for audit and assessment purposes. Another compliance aspect includes the correct classification of the service and applying the applicable rate based on the declared tariff. In case of multiple room categories within the same premises, the hotel must ensure that the correct GST rate is applied to each room based on its declared tariff.
Hotels that provide both exempt and taxable services must also comply with Rules 42 and 43 of the CGST Rules for the reversal of input tax credit on common inputs and input services. This can occur when a hotel provides accommodation services below the taxable threshold (declared tariff under Rs. 1000) alongside taxable services such as conference facilities or food and beverages. In such cases, proportionate reversal of ITC is necessary. Failure to maintain separate books or reverse ineligible credits can result in penalties and interest. Hotels also need to ensure the correct reflection of their business activities under the appropriate SAC codes while filing returns to avoid mismatches during audits.
Role of E-Invoicing and QR Code in the Hospitality Sector
E-invoicing has been progressively rolled out under GST law to improve compliance and streamline the reporting of B2B transactions. As of now, businesses with aggregate turnover exceeding Rs. 5 crores are required to generate e-invoices for B2B supplies through the designated Invoice Registration Portal (IRP). In the context of hotels and accommodation providers, if their turnover crosses this threshold and they supply services to registered businesses, e-invoicing becomes mandatory. This includes generating a unique Invoice Reference Number (IRN) and QR code for every such invoice. While most hotels cater primarily to B2C clients, those dealing with corporate clients, event organizers, or travel agencies may fall under the scope of e-invoicing.
For B2C transactions, although e-invoicing is not mandatory, the government has mandated that businesses with turnover exceeding Rs. 5 crores must display a dynamic QR code on B2C invoices. This dynamic QR code facilitates digital payments and enhances transparency in B2C transactions. Hotels must configure their billing systems to generate and print this QR code on the invoices provided to guests. The code must contain payment-related information, including UPI ID, invoice number, and payment amount. Non-compliance with this requirement can attract penalties under Section 125 of the CGST Act.
Hotels also need to consider the integration of their Property Management Systems (PMS) with GST e-invoice portals and ensure that relevant accounting and billing software are compatible with IRN and QR code requirements. This involves coordination between the IT and finance departments to ensure error-free transmission and real-time reporting of invoices. In case of errors, cancellation of IRN and re-issuance of invoices within prescribed timelines is necessary. As the threshold for mandatory e-invoicing continues to be revised downwards by the government, more hotels may come under its ambit in the future.
GST Implications on Bundled Services Offered by Hotels
Hotels often provide bundled services such as accommodation with complimentary breakfast, airport pickup, conference facilities, or wellness services like spa and gym access. These bundled services raise questions about how GST should be applied, especially when multiple components attract different tax rates. The concept of composite and mixed supplies under Section 2(30) and 2(74) of the CGST Act becomes relevant here. A composite supply is a naturally bundled set of services supplied in conjunction with each other, where one is the principal supply. In such cases, the GST rate applicable to the principal supply is levied on the entire bundle.
For example, when a hotel room is supplied with complimentary breakfast, and the stay is the primary purpose of the visit, the entire package will be treated as a composite supply. The tax rate applicable to hotel accommodation based on the declared tariff would apply to the entire value. However, if the hotel charges separate rates for each component in the bill, such as listing food and spa separately from accommodation, then each component is taxed at its respective rate—accommodation at 0%, 12%, or 18%, food and beverages at 5% or 18% depending on the restaurant classification, and spa services at 18%.
It is essential for hotels to carefully draft their invoices to reflect whether a service is a composite supply or individually priced. Invoices that do not specify distinct charges for each component could result in the entire amount being taxed at the higher rate applicable to one of the services, leading to potential disputes. Hotels must evaluate the nature of each bundled offer on a case-by-case basis and consider Advance Rulings issued by various authorities that have interpreted similar scenarios. These rulings, while not binding on all, guide how tax authorities are likely to view bundled offerings. Proper classification and documentation also help in accurate ITC claims, particularly where some services may be blocked or ineligible under Section 17(5).
Clarifications by the GST Council on Hotel Accommodation
To remove ambiguities in the interpretation of GST rates and applicability on hotel accommodation, the GST Council has issued clarifications from time to time. One such clarification pertains to the basis of valuation, where the Council confirmed that the GST rate should be based on the actual transaction value charged to the customer and not on the declared tariff. This change was introduced in 2019 and brought relief to both hotels and customers. The declared tariff was earlier used to determine the applicable GST slab, leading to confusion and higher tax charges even when discounted rates were offered. The Council clarified that GST would now apply to the actual amount charged after discounts.
GST on Banquet and Restaurant Services in Hotels
Hotels often offer bundled services including banquet halls, catering, and restaurant facilities. The GST implications for these services are distinct from accommodation services. For instance, restaurant services provided within hotel premises are taxed at 5 percent without ITC, provided the tariff of accommodation is below a certain threshold. However, if the hotel levies a service charge or if alcohol is served, different rates and conditions may apply. Banquet hall services are generally considered as renting of immovable property for business purposes and are taxed at 18 percent with ITC eligibility. These nuances are important for hotels to ensure compliance and for customers to understand the breakdown of taxes in their bills.
GST on Homestays and Unregistered Properties
The rise of online platforms has led to the proliferation of homestays and short-term rentals. GST applicability on such accommodations depends on various factors. If the total turnover of the service provider exceeds the threshold limit prescribed under GST, registration becomes mandatory and GST is applicable. However, where the aggregate turnover is below the threshold and the service provider is not registered under GST, there is no tax liability. The threshold limit for registration varies depending on the type of supply and location, but typically it is Rs. 20 lakhs per annum (Rs. 10 lakhs for special category states). Further, the GST Council has clarified that services by unregistered individuals through e-commerce platforms may attract GST liability on the platform operators under reverse charge.
Challenges Faced by the Hotel Industry Under GST
Despite simplifications, hotels face challenges in GST compliance. One of the main challenges is the frequent change in rates and conditions, which requires constant updating of billing systems and staff training. Small hotels and guest houses often lack the expertise to deal with complex GST norms. Another issue is the restriction on ITC for certain services such as food and beverages supplied in restaurants, even when part of business operations. Hotels operating banquet halls also face challenges in classification and treatment of mixed supply. Compliance with invoicing requirements, especially for bundled services, adds to the operational burden. These factors increase compliance costs and administrative workload.
Benefits of GST for the Hotel Sector
While there are challenges, GST has brought certain advantages to the hotel industry. One of the key benefits is the elimination of multiple indirect taxes that existed under the earlier regime, such as service tax, luxury tax, and VAT. A unified tax system has led to better transparency and streamlined processes. Hotels can also claim ITC on inputs and input services, except where explicitly restricted. This reduces cascading of taxes and enhances profitability. Additionally, interstate bookings and travel-related services have become easier to manage under GST due to a single registration framework and consistent rules. GST has also improved the competitiveness of Indian hotels in the global market by making tax compliance more structured and predictable.
Conclusion
GST on hotel accommodation services has undergone several changes to address industry concerns and simplify tax compliance. With tariff-based slabs, actual transaction value as the basis for taxation, and specific rules for restaurant and banquet services, the framework offers clarity but requires diligence in implementation. The eligibility for ITC plays a significant role in cost optimization for businesses in the hospitality sector. As the system continues to evolve, staying updated with the latest GST Council clarifications and legal provisions is essential for hotels, guests, and industry stakeholders to avoid compliance issues and optimize tax benefits.