The Positive And Negative Impacts That GST Had On The Hotel Industry

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It is no surprise that the tourism industry racks up a significant amount of the country’s economy, in a nation as diverse as India. India is renowned globally for housing some of the world’s most exceptional views, thus making it an ideal tourist spot.

Moreover, the industry is speculated to grow even more prominent by 2022, with growth as high as 16% accounting to a total of approx—2797 thousand crore INR. The sector also racks up almost 1/3rd of the country’s FDI, proving the importance of its role.

The Indian tourism industry has shown unprecedented potential, but the sector seemed barraged by hefty tax restrictions reaching as high as 30 % at times. Amidst all these hurdles, GST seemed like the ray of hope as the taxation system promised reduced industry cuts and additional perks for SMEs.

It is long time due for any business to pan out gst advantages and disadvantages, especially in the hotel industry. However, if you have not, then read through to know the effects of GST on the hospitality sector.

The State of Hotel Industry: Before and After GST

Before GST                                                                   

Traditionally, the hotel industry was liable to comply with numerous sets of taxes ranging from the luxury tax, service tax to value-added tax etc. The rates were ludicrous in some instances, like if a hotel room’s charge exceeded 1,000 INR, then the service tax would mount up to 15%. You would receive a 40% rebate, eventually lowering down the effective rate to 9%.

Unfortunately, it did not end there as then you would have to account for the VAT (generally 12-14.5%) and even luxury tax. The abatement rate rose to 60% for restaurants, ultimately leading the effective tax rate to a total of 6%, excluding the VAT.

The final cost for social events such as seminars and marriages were permitted 30 % rebate, meaning the cost of VAT would have to be borne by the consumers. Hotel owners and businesses were not allowed any input tax credit since central taxes cannot be rebated against state taxes like VAT.

After GST

GST rejuvenated the hotel industry by proposing benefits of uniformed tax rates, resulting in the optimal utilization of input tax credits. As it means a reduction in the final cost borne by the end-user, the industry is bound to attract foreign tourism like never before.

This essentially means an increase in revenue for businesses and a long stable run in the market. Here is an overview of the GST rates on hotels imposed on 1st October 2019:

GST Rates on Hotels as per the Room Charges

  1. If the charge per night is less than 1,000 INR, then no GST would be charged. The rates were the same before the introduction of GST.
  2. If the charge per night ranges between 1,001-7,500 INR, then the rate is charged at 12%. The rates pre-GST were also set at 12%, but for an amount between 1,000-2,500 INR.
  3. If the charge per night equals or exceeds 7,501 INR, then the GST rate is charged at 18%. The pre-GST rates were set at 18%, but the charged amount ranged from 2,500-7,500 INR.
  4. If the amount exceeded 7,500 INR, then the pre-GST rates surged to 28%.

Benefits of GST on the Hotel Industry

Ease of Administration

As GST lead up to the eradication of numerous additional taxes, it liberated the businesses from the hour-long tax processes. Hotels can now utilize the saved time and resources elsewhere, meaning their earnings increase with the same set of funds.

Enhanced Service Quality

GST also aids in improving the service quality, as it reduces the bill computation time to a bare minimum. As there is only one tax to account for, the check-out procedures at hotels have simplified radically.

Consumer Clarity

Expecting the masses to know their way around every set of tax is irrational, and GST helped ease up the issue as well. Under the GST system, the consumer needs to centralize their focus on a single tax, thus allowing them to comprehend their expenditures clearly.

Input Tax Availability

The hotel industry was refrained from claiming the input tax credit previously, but it has changed now. Pre-GST, the tax charged for inputs such as food or cleaning supplies was complex to adjust; however, now the routine process has been simplified as well.

Here is an overview of the situation:

  1. Standard Rooms
Pre-GST Post-GST
Room Charge 3,000 3,000
Luxury Cost on the Stay (10% in Maharashtra) 300
Service Tax charged @ 9% 270
GST charged @ 12% 360
Total Cost 3,570 3,360
2. Rooms with the Availability of Complimentary Breakfasts Pre-GST Post-GST
Room Charge 3,000 3,000
Complimentary Breakfast 500 500
Luxury Cost on the Stay (10% in Maharashtra) 300
Service Tax charged @ 9% 270
VAT @ 14.5% on food 73
GST @ 12% 360
TOTAL BILL 4,143 3,860

Adverse Effects of GST on the Hotel Industry

Added Technological Load

Although GST has eased up the significant portion of the complicated tax computation processes, it undoubtedly requires the businesses to be adept with technology.

While this does not seem like a threatening issue on the surface, it can rack up some unprecedented problems, resulting in an added technological load. If you are facing troubles preparing the invoices, then you should get familiar with the gst tax invoice format in excel free download.

Increased Costs in Some Areas & Instances 

In areas like Maharashtra, where pre-GST taxes were set at 19% for hotel rooms and 18.5% for food, the cost has barely go down. Now with GST charging a total of 18% tax, the cost does not seem to be going down that much.

On the other hand, the businesses feeling a technological burden may try to recover the cost from consumers, leading up to an increase in the costs.

Incompetency with Neighbour Countries                                 

With India aiming to expand its reach on the global tourism turf, the tax rates do not seem to be backing up the industry at all. Admittedly, the tax rates have gone down, but the Indian tax system still looks incompetent when compared to its neighbours like Singapore and Japan.

With both countries changing tax rates at 8% and 7% respectively, India is nowhere near the competition to garner more crowd. There is no denying the beauty in the Indian terrain, but when it comes to the support by its tax system, the industry is bound to face severe hurdles.

To Wrap Up

GST seems to be a mixed bag of pros and cons on the surface, but if you delve deeper, you are bound to notice that the taxation system packs some significant advantages. With the Indian tourism industry prospering on a global platform, there is a dire need for steps like GST to give the sector the necessary push.