GST on Hotels and Restaurants : Tax Structure and Provisions

The hospitality sector, comprising hotels and restaurants, forms a significant part of the Indian service industry and has undergone major transformations under the Goods and Services Tax (GST) regime. Before GST, hotel and restaurant services were subject to multiple indirect taxes, including service tax, VAT, luxury tax, and entry tax, resulting in complexity and high compliance costs. The introduction of GST unified these taxes into a single system, simplifying compliance and improving transparency. GST has also created a centralized structure where both service and goods elements involved in hospitality services are taxed under one umbrella. This thesis presents an in-depth exploration of the GST implications on hotels and restaurants, including tax rates, exemptions, input tax credit provisions, compliance obligations, and operational implications.

Hotel accommodation services are taxable under GST when the value of supply meets or exceeds specific tariff-based thresholds. GST is levied based on the declared tariff or actual transaction value, whichever is relevant for determining the applicable slab. When the tariff is low, GST may be exempted; but as tariff increases, the applicable rate proportionally increases. Hotel rooms with a declared tariff below a certain threshold enjoy exemption, supporting budget accommodation and encouraging domestic tourism.

As the room tariff increases into higher slabs, GST applies at corresponding rates. The hospitality sector must classify its room tariffs accurately and ensure transparent pricing to prevent misinterpretation. Hotels are also required to maintain proper records of tariffs and invoices to comply with GST requirements. The shift from multiple state-level taxes to a uniform GST structure has simplified the taxation but demands strict adherence to classification rules.

One of the key concepts in GST for hotels is the distinction between “declared tariff” and “transaction value.” The declared tariff refers to the published room rent—whether on the hotel’s website, booking portals, printed brochures, or displayed at the reception. Even when discounts are offered, the applicable GST rate depends on the declared tariff, though tax is calculated on the discounted transaction value. This ensures consistency and prevents manipulation of rates to gain tax benefits.

For example, if a hotel’s declared tariff places it in a higher GST slab but the hotel offers a discount, the lower price does not change the GST rate. Therefore, hotels must clearly display and document declared tariffs to justify the rate applied. This rule reflects GST’s principle of classification based on potential value rather than negotiated price.

Restaurant services form a significant part of the hospitality sector and are taxable at a flat rate under GST. Restaurants that operate with or without air-conditioning charge a standard rate of GST on the supply of prepared food and beverages. Unlike the earlier regime where VAT and service tax applied separately, GST treats restaurant services as a composite supply, eliminating disputes over the goods–service split.

GST ensures uniformity in taxation across restaurants, whether they operate independently, within hotels, or as part of a franchise chain. Restaurant operators, including cloud kitchens and take-away counters, must follow the standard GST rate applicable to food supplies. Compliance must also align with invoicing standards, proper classification, and maintenance of records for both dine-in and takeaway orders.

One of the significant features of GST for restaurants is the non-availability of input tax credit (ITC). Restaurants are not allowed to claim ITC on inputs used for preparing food, beverages, or for operational expenses such as rent, equipment purchases, interior décor, or utilities. This restriction ensures simplicity but can increase operational costs for restaurant operators.

By disallowing ITC, GST encourages transparency in pricing but may result in higher cost structures for restaurants, especially high-end establishments. Restaurants operating within larger hotels under certain conditions may have separate tax treatment, but standalone restaurants are subject to this restriction uniformly.

Hotels, unlike restaurants, enjoy access to input tax credit under GST. Hotels use a variety of inputs such as consumables, electricity, cleaning supplies, AMC services, and infrastructure. Allowing ITC helps reduce the effective tax burden and enhances the competitiveness of the hotel industry. Hotels offering both accommodation and restaurant services must segregate invoices and classify supplies accurately to ensure appropriate ITC claims.

Although accommodation services allow ITC, the disallowance for restaurant services means that hotels must maintain robust internal records to distinguish between credit-eligible and non-credit-eligible expenses. This dual treatment reflects the GST principle of credit availability based on the nature of supply rather than the nature of the taxpayer.

Homestays, guest houses, and small lodges also fall within the GST structure based on their room tariffs. Many small accommodations fall under exempt categories due to low declared tariffs, supporting small tourism businesses, especially in rural or semi-urban locations. Those charging above the exemption threshold must comply with GST rates applicable to hotels. GST applies uniformly across all forms of accommodation, ensuring that homestays and small operators follow simplified compliance when above thresholds.

For registered operators, maintenance of proper accounting records, invoices, and tariff classification remains essential. The exemption threshold encourages small-scale hospitality entrepreneurship while maintaining a structured tax mechanism for larger operators.

Hotels often operate in-house restaurants and room service facilities. While room service food delivery resembles restaurant service, it follows the GST rate applicable to restaurants. Even when food is served inside rooms, banquet halls, event spaces, or pool areas, the same GST rate applies without distinction. Hotels must ensure correct classification and invoicing, as treating food services separately or at incorrect rates may lead to compliance issues.

Food served as part of event packages or conferences is also taxable at the standard restaurant GST rate unless forming part of a composite supply with a dominant accommodation element. Understanding such distinctions is crucial for tax planning and correct billing.

Hotels often offer bundled services such as accommodation combined with breakfast, airport transfers, spa packages, and sightseeing tours. Under GST, these bundled services may be classified as composite or mixed supplies depending on their predominant element. When accommodation is the main supply and other services are incidental, the entire package may attract the GST rate applicable to hotel accommodation.

However, if non-accommodation services are distinct and not naturally bundled, separate GST rates may apply. Hotels must evaluate the nature of each bundled offering to ensure proper taxation. Misclassification can lead to excessive tax burden or penalties during audits.

Hotels frequently host weddings, conferences, corporate events, and banquets. Catering services supplied in these events are taxable, and the GST rate depends on the nature of service and location of supply within the hotel premises. When catering forms the primary supply, GST applies at the standard catering service rate. If accommodation and banquet services are combined into a single package, tax classification must consider the dominant nature of supply.

Event venues located in hotels must also comply with GST rules on renting immovable property along with catering, audio-visual equipment rental, and additional services. These complex arrangements often require careful tax planning and proper segregation of invoices to avoid disputes.

Hotels and restaurants must comply with a variety of GST requirements, including registration, invoicing, return filing, and record maintenance. Daily transactions, supply of food, room bookings, banquets, and services must be properly invoiced according to GST guidelines. Operators must track input credits, identify disallowed credits, compute output tax, and ensure timely payment of GST.

Given the high volume of transactions, hospitality businesses often rely on automated billing and accounting systems to ensure compliance. GST audits require hotels and restaurants to maintain tariff records, discount policies, package service breakdowns, and counterfoil invoices for scrutiny. A strong compliance mechanism prevents penalties and enhances the credibility of the hotel or restaurant.

In today’s digital environment, many hotel bookings are made through online travel portals such as OTAs and aggregators. GST applies to such transactions based on the service provided by the hotel and the commission charged by the portal. Hotels must correctly account for bookings made through these platforms and ensure proper GST treatment for both room rent and commission payments. This ecosystem ensures transparency but requires alignment between hotel systems and aggregator systems.

Restaurants operating through takeaway counters, cloud kitchens, or delivery services are fully taxable under GST at standard restaurant rates. GST applies to the supply of prepared food irrespective of whether the customer dines in or takes the food away. Cloud kitchens, although without physical dining space, are treated as restaurants for GST purposes. This uniformity ensures consistency in taxation across various forms of food service.

While GST simplified taxation, the hospitality sector faces challenges such as classification of bundled services, dual treatment of hotel and restaurant supplies, restrictions on ITC for restaurants, and complexities in multi-state operations. Hotels with different facilities must ensure clear demarcation between supplies eligible for ITC and those that are not. Additionally, high dependency on digital transactions requires robust internal systems for accuracy and compliance. Event management, catering, and composite supplies further complicate GST applicability and demand careful planning.

GST brought a unified tax structure to the hospitality sector, simplifying the earlier multi-tax framework and creating a more transparent system. Hotels benefit from ITC on infrastructure and operational inputs, while restaurants follow a simplified tax rate structure without input credit. Accommodation, food services, banquets, and event services each have distinct GST implications that require accurate classification and compliance. With proper documentation, invoicing, and internal systems, the hospitality sector can manage GST efficiently while maintaining regulatory compliance. The GST regime continues to evolve, and businesses must stay updated to fully optimize tax benefits while avoiding potential pitfalls.

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