How GST will Impact the Hotel Industry

Last updated on 18 Jan 2023

"The hotel industry is undecided on the outcome of a combined GST rate. Everyone is waiting to see how it affects the sector. Here are some of the main anticipated pros and cons."

GST has been one of the most 'used' terms of 2016 and did take the service industry by storm. While GST has become a household term, most of us are still unaware of the implications it will have, especially on the hotel industry. So let us figure out what it means for the hotel industry. Is it looking merry all the way or taking the profit cherry out of the way?

On 3rd August 2016, the bill to introduce The Goods and Service Tax (GST) was passed in the Upper House of the Indian Parliament — The Rajya Sabha. GST, touted as one of the biggest fiscal reforms since the 1991 liberalisation policy, was passed with unanimous approval.

What is GST?

GST is a unified approach to indirect taxation. A "one nation one tax" slogan which replaces the plethora of taxes levied under different names like service tax, value added tax (VAT), entertainment tax, cess, etc. These various forms of charges are combined to serve a single purpose — a blanket indirect tax on the final produce. This GST is then divided among the Centre and State as Central GST and State GST.

The proposed rate for GST is a four-tiered structure of 5%, 12%, 18% and 28%. The hotel industry has been pegged at an 18% rate. This, a lot of industry veterans have suggested, could be detrimental to the sector. The Hotel and Restaurant Association of Western India believes that a rate of 5% is more befitting.

However, the industry is united in proclaiming it a welcome move because it also has many benefits. Below are the ways in which GST affects the hotel industry, positively and negatively:

Pros

Administrative Ease

The introduction of GST eliminates various other taxes and cesses to prevail as the only charge that hotels must account for. This means a reduction in procedure steps and more opportunities to streamline the taxation process.

Clarity for Consumers

How many times do we, as customers, care to check where the tax really is going? For an end user, it is still difficult to differentiate between a VAT and an entertainment tax. The hotel customer will only see a single charge on their bill and that gives them a better idea of the cost they are incurring.

Time Saving and Improved Quality

The elimination of a lot of entries from the hotel's book of accounts means lesser time to process a transaction. This also means that the consumer gets their orders faster and fresher and room reservations become an easy breezy process!

Cons

Technological Burden

Even though the government has introduced the bill and set out a date for its roll-out, there still isn't enough clarity on its implementation. There will need to be systems in place and clear guidelines as to how the accounts need to be maintained and returns filed. On its launch, the Service Tax created a lot of confusion too, and hopefully the authorities will ensure a more seamless implementation of GST.

Possibility of Increased Cost

Take the present taxes in the state of Maharashtra for example. The taxes on hotel rooms are currently 19% (Luxury Tax = 10% plus Service Tax = 9%) and those in the F&B segment are 18.5% (VAT = 12.5% plus Service Tax = 6%). Compare these rates with GST at flat 18%, and the benefits are not substantial — 1% and 0.5% savings for rooms and F&B respectively. Add the costs for new systems and accounting practices, and the charges might surpass the benefit.

Competition from Asian Markets

India is now a global competitor in the hotel and travel industry. To have an equal footing, Indian GST rates should match its Asian counterparts but they are nowhere close:

• Singapore — 7%
• Malaysia — 6%
• China — 11%
• Japan — 8%

The wide gap provides an unfair advantage to competitors and could make potential tourists reconsider their travel plans.

Policy in itself is not the solution — proper implementation is. Issues such as leaving alcoholic beverages out of the GST purview might create additional hassles for the hotel industry and the sooner they are addressed, the better. All in all, there are equal pros and cons — we'd say cons are a little heavier until the process and regulations are well understood.