The GoI in its recent GST council meet held at Goa has slashed GST rates for hotels and restaurants in various categories. This downward revision is in line with the recommendations of the various industry participants, with the competitive ability of the industry affected by higher GST rates. As per ICRA’s note, this is a strong positive for the industry as this rate cut comes at a much-needed time when the domestic hotel industry is facing slowing demand prospects both on foreign tourist arrivals and domestic travellers. At the time of initial implementation of GST, the 28% rate for hotels with tariffs greater than Rs7,500 led to higher tax rates in a few states in India. Under the pre-GST regime, room revenues attracted luxury taxes and service tax. Luxury tax, being a state subject, varied from state to state and was computed using different methods and rates, leading to effective taxation rates ranging from 18-25%. Post GST, while these differences were smoothened out, few states like Maharashtra faced substantially higher rates under the 28% regime.
Pavethra Ponniah, Vice President & Sector Head, ICRA, “The immediate term impact of this rate cut would be a rationalisation of tariffs, particularly in the upper-upscale and luxury segments as hotels adjust to the lower rates, potentially stimulating higher demand and consequently occupancies. This, to a limited extent, will also narrow the GST rate differential between India and neighbouring countries (GST rates of 7-8%) potentially drawing back meeting, incentives, conference and exhibition (MICE) traffic that India was losing out on. Importantly, this opens up room for an increase in net room rates which the hotels effectively earn. The Indian hospitality industry, despite witnessing a sustained increase in occupancies since 2017, has been unable to push for higher average room rates constrained by fear of incremental supply and loss of guests to the competition. With lower tariffs post the GST cut, the industry will attempt to push for higher net rates.” As regards, outdoor catering, a relatively newer ancillary income vertical for hotels, could also benefit from the lower 5% GST rate (without income tax credit), but the same is contingent on other fixed costs like rental which attract GST. Major consumable for restaurants like grains (not packaged), vegetables, poultry, and seafood are exempt from GST.