Agarwal Sanjiv & Company,

Chartered Accountants

IMPACT OF GST ON HOTEL INDUSTRY

Introduction

“Athithi devo bhavha” (Guest is God) has been one of central tenets of Indian
culture since times immemorial. Today, hospitality sector (which includes tourism
also) is one of the fastest growing sectors in India and is expected to grow at the
rate of 8 % between 2007 and 2016. The boom in travel and tourism has led to the
further development of hospitality industry. Consequently the hospitality industry
is expanding globally and promoting its growth in a changing multicultural
environment. Hotels contribute the output of goods and related services which
build well being of their nations and communities.

Goods and Services Tax (GST) as a tax reform

Migrating to Goods and Services Tax (GST) is a time to revinict the taxation and
remove the anomalies. Hotel industry (includes tourism) contributes to 6.23
percent to the National GDP and 8.78 percent of the total employment in the
country.

Goods and Service Tax (GST) is a destination based consumption tax which is a
levy of tax on all goods and services with the objective of expanding the tax base
through wide coverage of economic activities , mitigating the cascading effect ,
reduction of exemptions , enable better compliances etc. thereby resulting into
formation of common national market for goods and services .

Present Scenario
Hotel Sector in India is presently covered as one of the priorities of the Government
and as such is allowed tax relief in the form of abatements vide N.No. 26/2012-ST
dated 20.06.2012.

Presently, the hotel industry is plagued by multiple of taxes i.e., Service tax ,
luxury tax and VAT which ultimately results into cascading effect. The three taxes
that are levied are the VAT and luxury tax by the States and service tax by the
Centre. The VAT rate varies from state to state (generally levied between 12% to
14.5%), luxury tax depends on the room tariff and the state (generally varies from
 Agarwal Sanjiv & Company,
Chartered Accountants

Nil to 12%). Similarly, service tax varies on the type of service. For hotels with room
tariff in excess of Rs 1,000 and above, service tax is applicable at 60% of room tariff
in addition to VAT (ranging between 12 to 14.5%) and luxury tax wherever
applicable. In case of restaurants on the F&B bills, service tax is applicable on 40%
of the bill or effective rate of 5.8% apart from VAT @ 12 to 14.5%. In case of social
functions (marriage, seminars etc.) the applicable service tax rate after 30%
abatement is 10.15%.

When the VAT, service tax and luxury tax are combined, the total impact goes up
and lies between 20 to 27 percent. As input credit from central taxes cannot be set-
off against VAT liability and vice-versa, this leads to cascading effect.

The present rate of service tax is 15% including cesses viz Swachh Bharat Cess
(SBC) and Krishi Kalyan Cess (KKC).

In GST Regime:

According to the Model law on GST which neither contains the exemptions nor the
rates of taxation , it appears that all services in relation to hotels and restaurants
would be subject to levy of GST as the same is to be treated as ‘supply’. Section 3
read with Schedule II stipulates that supply, by way of or as part of any service or
in any other manner whatsoever, of goods, being food or any other article for
human consumption or any drink (other than alcoholic liquor for human
consumption) , where such supply or service is for cash , deferred payment or other
valuable consideration shall be treated as supply. However, the rates are expected
to be in the range of 18-20%.

In the proposed GST regime, GST shall be payable by taxable persons on the
supply of goods and services. Taxable person is defined in Section 9 of Model GST
law which stipulates that a person who carries on any business at any place in
India / State and who is registered or required to be registered under Schedule III
of the Act.

Further, a person is required to be registered if its aggregate turnover in a financial

year exceeds Rs. 20 lakhs all over India other than North Eastern states.

For North - eastern states including Sikkim and hill stations, the threshold limit
would be Rs. 10 lakhs.
 Agarwal Sanjiv & Company,
Chartered Accountants

There are no specific provisions for inclusions or exclusions of hotels and

restaurants services or any other activity related to hotels / restaurants elsewhere
in the proposed law.

Likely Impact in GST regime:

Based on the provisions of Model Law, it can be said that hotel sector shall be
impacted both positively and negatively under the GST regime.

(i) The multiple taxes would be replaced by one single tax, the rate of which is
likely to be between 16%-18%. The hotel industry would benefit in the form
of lower tax rate which should help in attracting more tourists in India.
(ii) There are likely to be concerns in valuation of restaurant services in view of
the industry practice of discounts / offers / policies in the form of
incentives. The proposed valuation rules are different from the existing ones
and as such this sector need to frame an appropriate policy for such
discounts in advance making it a part of documentation.
(iii) Service providers having centralized registration will have to get registered in
each state whether providing hotel services on own account or through agent
(franchise).
(iv) Service providers will have an option to take different registration or separate
business verticals which needs to be examined on case to case basis.
(v) The procedure for all the invoices / receipts towards inward and outward
supplies will become cumbersome as each one of them will have to be
uploaded in the system.
(vi) The frequency and number of returns to be filed will go up.
(vii) There is a provision for GST audit if the turnover is more than the prescribed
limit.
(viii) The e-commerce companies may have to revamp the current models, as the
VAT rate arbitrage available in the current law may not be available in GST.
Tax Collection at Source (TCS) provisions have been introduced on e-
commerce operators in the Model GST Law. However, there are no provisions
relating to collection of tax at source under the current tax regime.
(ix) Alcohol and electricity are out of the purview of GST net. The taxation on
alcohol would be different than the single GST rate. The hotel industry
 Agarwal Sanjiv & Company,
Chartered Accountants

consumes a lot of electricity as a prime consumable and the levy of

electricity duty would also not be covered in GST. Thus, the hotel industry
would not be able to avail the input credit on the two items which will have a
negative impact on this sector.
(x) The hotel industry spends a lot of money on construction and renovation.
They have to move with the times in order to remain competitive and attract
customers. The money paid as taxes on the construction activities cannot be
used as input credit to set off the taxes paid on the services offered by the
hotels and restaurants. The R&D cess which is applicable on technical
know- how fees and franchise agreements in the industry is likely to become
a part and parcel of GST.

Conclusion

Companies specializing in food and beverages operations could be the biggest

beneficiaries of GST within the hospitality sector. Food and beverages bills have
multiple components and can inflate the bills by 30-35%. A single-slab tax will
benefit consumers and should lead to savings of 10-15% on the overall bill.

The restaurant industry has been burdened with high and multiple taxations.
However, liquor should be included in GST. Exempting it defeats the very purpose
of bringing in a uniform single tax structure. This allows states to have their own
taxes without a cap with separate accounting requirements and results in double
compliance for the restaurant / hotel industry. This is neither beneficial for 'Ease of
doing business' nor for the customers,

"Everybody likes consolidation of taxes as it leads to greater transparency and will

help guests and buyers understand overall costs. We welcome the development,"
said Raj Rana, CEO, South Asia, for hotel group Carlson Rezidor. "Some states
have luxury tax and that impacts room rates. If India aspires to be competitive,
then the tax structures too need to be competitive."

Luxury and other service taxes in hospitality amount to more than 22%, compared
with the proposed 18% under the GST regime. Overall, GST should be positive for
the sector assuming the multiplicity of taxes will go away in food and beverages.

The lacunas in the present regime of indirect taxation in India demands for the
major breakthrough in this field for facilitating the ease of doing business
 Agarwal Sanjiv & Company,
Chartered Accountants

effectively and efficiently. Hopefully, GST is going to be pinnacle which aims at

evolving an efficient and harmonized consumption or destination based tax system
and will remove the problems faced by the sector leading to cost optimization and
free flow of transactions.