GST Policy Update: No Input Tax Credit (ITC) for Hotels with Room Rates Under Rs 7,500

Ministry of Finance Confirms No ITC for Hotels Charging Room Rates Below Rs 7,500 Under 5% GST Slab

The Ministry of Finance has reiterated that hotels with room rates up to Rs 7,500 per unit per day will not be eligible for Input Tax Credit (ITC) under the 5% GST slab. This clarification, issued through a series of frequently asked questions (FAQs), has sparked concerns within the hospitality industry, particularly for mid-range and budget hotel segments.

According to the ministry, suppliers of hotel accommodation services with room rates below or equal to Rs 7,500 will be required to charge GST at 5%, without the option to claim ITC on such units. This is a mandatory rate under the Goods and Services Tax (GST) system, and the alternative option of paying GST at 18% with ITC will not be available for these hotel units.

In response to industry concerns, the Ministry of Finance confirmed this policy after a query regarding whether hotels could continue to supply rooms under the 18% ITC-inclusive slab. The ministry's stance was clearly outlined in a statement issued through the Press Information Bureau (PIB).

A Shift from Previous Tax Structure

Previously, rooms priced up to Rs 7,500 were taxed at a 12% GST rate, with the option to claim ITC. The shift to the 5% slab without ITC has raised alarm among hoteliers, as the inability to reclaim taxes paid on inputs and services will significantly increase operational costs.

The Hotel Association of India (HAI) has expressed concerns over this decision, urging the Ministry of Tourism to facilitate discussions regarding possible changes. According to HAI’s Secretary General, this removal of ITC would negatively impact hotel companies in the mid-scale and budget categories, potentially discouraging investment and expansion in the hospitality sector.

Industry Response and Concerns

The HAI has already written to the Ministry of Tourism, advocating for a re-evaluation of the policy and highlighting the adverse effects on hotels in the mid-tier segment. The association is also in the process of gathering data to demonstrate the financial impact of excluding ITC for these hotels. However, industry experts agree that most hotels will likely have to absorb the additional costs without passing them onto customers.

The Federation of Associations in Indian Tourism and Hospitality (FAITH) also weighed in on the matter, with its General Secretary noting that hotels would face rising operating costs as a result of the new GST structure. However, he emphasized that hotel owners will need to make strategic decisions about whether to pass on the additional cost burden to customers or absorb it internally.

Request for Special Consideration

In light of these concerns, many hotel operators have requested that the government reconsider the policy and provide ITC on the 5% tax slab for room rates up to Rs 7,500 as a special case. This request highlights the industry's need for a tax structure that supports sustainable growth and investment in the sector.

Looking Ahead

As the debate continues, it remains to be seen whether the government will make adjustments to the GST framework for the hospitality industry. For now, hotels will need to navigate the new tax policy, and many in the industry are preparing for the potential financial strain that comes with the exclusion of ITC under the 5% slab.

Conclusion

The clarification by the Ministry of Finance has brought clarity but also raised significant concerns about the future of mid-scale and budget hotels in India. The hospitality industry, especially those in the budget and mid-tier categories, will need to monitor developments closely and work with government bodies to address the challenges posed by this new GST policy.