Input Tax Credit (ITC) for Hotels: Tips to Maximize Benefits under GST 2.0 September 2025

Last updated on 17 Dec 2025

The Indian hospitality industry witnessed a significant transformation when the GST Council rolled out comprehensive rate changes effective 22nd September 2025. These reforms, commonly referred to as GST 2.0, have fundamentally altered how hotels manage Input Tax Credit (ITC), creating both challenges and opportunities for hoteliers across budget, mid-scale, and luxury segments.

If you are in the hotel business, understanding these changes is essential for protecting your margins and staying competitive. Let's break down what's changed and how you can maximize your ITC benefits under the new regime.

What Changed in September 2025?

The New Two-Tier GST Structure

GST 2.0 introduced a simplified two-slab system for hotel rooms:

For Rooms less than or equal INR 7,500 per night:

• GST Rate: 5% (down from 12%)

• ITC Availability: Not allowed

• Impact: Lower guest prices but no tax credit for hotels

For Rooms greater than INR 7,500 per night:

• GST Rate: 18% (unchanged)

• ITC Availability: Full ITC allowed

• Impact: Complete tax credit on inputs, services, and capital goods

Special Note: Rooms priced at INR 1,000 or below remain exempt from GST.

The ITC Game-Changer

Here's the critical shift: rooms taxed at 5% are now treated similar to exempt supplies. This means hotels cannot claim ITC on inputs used for these budget accommodations. For many mid-scale properties, this translates to:

• No credit on utilities (electricity, water)

• No credit on housekeeping supplies

• No credit on laundry services

• No credit on maintenance costs

• No credit on a proportionate share of capital goods

Understanding the ITC Impact: Real Numbers

Let's look at what this means in practice:

Example 1: Budget Hotel (All rooms less than or equal INR 7,500)

Result: While guests save INR 420, the hotel's tax burden increases by INR 180 per room night.

Example 2: Mixed Hotel (Rooms below and above INR 7,500)

Hotels with diverse room categories face the most complex scenario. They must:

• Calculate proportionate ITC for budget vs. premium segments

• Reverse ITC monthly under Section 17(2) and Rules 42-43

• Maintain separate accounting for different service categories

10 Strategies to Maximize ITC Benefits Under GST 2.0

1. Strategic Tariff Engineering
While you cannot artificially manipulate prices, you can structure your offerings strategically:

• Bundle smartly: Package room stays with meals or spa services to cross the INR 7,500 threshold

• Dynamic pricing: During peak seasons, price premium categories above INR 7,500 to retain ITC benefits

• Room categorization: Clearly distinguish between budget and premium inventory
  Caution: Tariff engineering must be genuine and commercially justified. Artificial price inflation can invite GST scrutiny.

2. Become a Specified Premises
A hotel qualifies as specified premises if:

• At least one room exceeded INR 7,500 in the previous financial year, or

• The hotel voluntarily declares itself as specified premises

Benefits of being specified premises:

• Restaurant and F&B services can charge 18 percent GST with full ITC

• Better margins on dining operations

• Simplified accounting for bundled services

Action: Even if you're primarily a budget hotel, consider pricing select rooms or suites above INR 7,500 to qualify for specified premises status.

3. Optimize Your Input Mix
For hotels with mixed room categories, identify which inputs can be exclusively attributed to premium rooms.
Exclusive Use Strategy:

• Premium room amenities such as luxury toiletries and premium linens

• Exclusive facilities like executive lounge and premium gym equipment

• Dedicated staff for luxury segments

Inputs used exclusively for rooms greater than INR 7,500 allow full ITC without proportionate reversal.

4. Master Monthly Proportionate ITC Calculations
Hotels with both slabs must calculate ITC reversal monthly using this formula:
ITC Reversal = (Turnover from rooms less than or equal to INR 7,500 / Total Turnover) × Total ITC on common inputs

Best Practices:

• Use automated accounting software for accuracy

• Maintain separate ledgers for each service type

• Reconcile GSTR-2B before claiming ITC

• Document the calculation methodology clearly

5. Utilize Existing ITC Before 22nd September 2025
Any accumulated ITC in your electronic credit ledger as of 21st September 2025 can be used to offset output tax liabilities. After that:

• You must reverse ITC attributable to budget rooms

• This includes proportionate reversal on capital goods

• Maintain audit trails for reversal calculations

6. Leverage Full ITC on Ancillary Services
Several hotel services still qualify for 18 percent GST with full ITC:

• Banquet and event services

• Restaurant services in specified premises

• Conference rooms and business centers

• Laundry services for external clients

Strategy: Develop these revenue streams to offset ITC losses from budget rooms.

7. Ensure GST-Compliant Invoicing
To claim ITC on eligible services, your invoices must include:

• Valid GSTIN of both supplier and recipient

• Invoice number and date

• HSN/SAC codes

• Tax rate and amount clearly shown

• Signature or digital authentication

Pro Tip: Implement invoice management systems that flag non-compliant invoices before processing.

8. Claim ITC on Permissible Expenses
Maximize ITC claims on these commonly overlooked areas:

Fully Claimable:

• Construction materials for renovation in premium sections

• Furniture and fixtures exclusive to rooms greater than INR 7,500

• Technology infrastructure such as PMS and channel managers

• Marketing and promotional services

• Professional services like legal and accounting

• Insurance services

Not Claimable:

• Motor vehicles except for guest transport for further supply

• Personal consumption items

• Employee welfare expenses

• Goods or services for exempt activities

9. Manage Capital Goods ITC Carefully
Capital goods purchased before GST 2.0 require special attention:

• Full ITC: Available if capital goods are used exclusively for rooms greater than INR 7,500

• Proportionate ITC: Required if used for both categories

• Reversal Required: For capital goods exclusively serving budget rooms

Example: An HVAC system serving the entire property requires monthly proportionate ITC calculation based on room-wise revenue.

10. Stay Compliant with Reversal Requirements
Under Section 17(2) of the CGST Act, hotels must:

• Calculate monthly: Proportionate ITC based on turnover ratios

• File Form GSTR-3B: Declare reversed ITC accurately

• Maintain records: Document calculations for audit purposes

• Track deadlines: Ensure timely filing to avoid interest and penalties

Special Considerations for Different Hotel Segments

Budget Hotels (All rooms less than or equal to INR 7,500)
Challenges:

• Complete loss of ITC

• Increased operational costs

• Reduced profitability margins

Optimization Strategies:

• Negotiate better input prices with suppliers

• Focus on operational efficiency

• Consider creating premium suites above INR 7,500

• Develop ancillary revenue streams such as banquets and F&B

• Absorb costs in the short term to gain from higher occupancy

Mid-Scale Hotels (Mixed Inventory)
Challenges:

• Complex proportionate ITC calculations

• Monthly compliance burden

• Mixed margin impact

Optimization Strategies:

• Implement robust accounting systems

• Clearly segregate inventory categories

• Price strategically during high-demand periods

• Maximize specified premises benefits

• Focus on premium room conversions

Luxury Hotels (All rooms greater than INR 7,500)
Challenges:

• Minimal direct impact

• Potential guest price sensitivity

Optimization Strategies:

• Continue claiming full ITC

• Focus on value additions and guest experiences

• Leverage specified premises status fully

• Optimize input procurement

• Maintain premium positioning

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Common Mistakes to Avoid

1. Mixing Up Service Categories
   Do not club room services with restaurant or banquet services in billing. Each attracts different GST rates and ITC rules.

2. Ignoring the Monthly Calculation Requirement
   ITC reversal must be calculated monthly, not annually. Waiting until year-end invites compliance issues.

3. Failing to Maintain Documentation
   In case of GST audits, you must demonstrate how you calculated proportionate ITC. Poor documentation leads to disputes.

4. Not Distinguishing Between Business and Leisure Bookings
   For B2B clients, ensure proper GSTIN details are captured. Business travelers can claim ITC only on rooms above INR 7,500.

5. Overlooking Specified Premises Implications
   If you qualify as specified premises but do not declare it, you lose the 18 percent ITC benefit on F&B services.

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Technology Solutions for ITC Management

Modern hotel management requires integrated systems:

Essential Tools:

• PMS (Property Management System): Auto-calculates GST based on room rates

• Accounting Software: Tracks ITC and automates reversal calculations

• Channel Manager: Ensures consistent pricing across OTAs

• GST Compliance Software: Files returns and reconciles GSTR-2B

Recommended Features:

• Real-time tax calculation

• Separate ledgers for different service types

• Automated ITC reversal computation

• Integration with GST portal

• Audit trail maintenance

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Looking Ahead: Future-Proofing Your Hotel

Industry Advocacy:
Hotel associations continue to engage with the government for potential revisions:

• Proposals for 50 percent ITC on 5 percent slab (similar to banking sector)

• Request for F&B delinking from room tariffs

• Composition scheme for F&B with turnover up to INR 5 crore

Adapting Your Business Model:

Short-term Actions (0-6 months):

• Complete ITC reversal for pre-22nd September balances

• Train accounts team on new calculations

• Update billing systems

• Review pricing strategies

Medium-term Actions (6-12 months):

• Analyze margin impact segment-wise

• Consider property upgrades to justify higher rates

• Develop premium service offerings

• Build ancillary revenue streams

Long-term Strategy:

• Evaluate specified premises declaration

• Plan renovations with ITC implications in mind

• Consider portfolio optimization (budget vs. premium)

• Invest in guest experience to justify premium pricing

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Conclusion

GST 2.0’s September 2025 reforms have fundamentally reshaped ITC planning for hotels. While budget properties face margin pressures from lost tax credits, the lower 5 percent rate can drive higher occupancy and revenue. For mixed properties, the key lies in meticulous accounting and strategic pricing.

The most successful hotels under this regime will be those that:

• Embrace technology for accurate ITC calculations

• Structure their offerings strategically

• Diversify revenue streams beyond room rentals

• Maintain impeccable compliance

• Focus relentlessly on guest value

Remember, GST compliance is not just about avoiding penalties; it is about optimizing your tax position legally and ethically. Proper ITC management can be the difference between struggling margins and sustainable profitability.

Stay informed. Stay compliant. Stay profitable.