Implemented in July 2017, the Goods and Services Tax (GST) is a non-discriminatory tax and its effects can be seen across all applicable sectors. As there is a lot of information published on GST at large, we think that elaborating on the impact on specific sector might help persons from the respective sectors to better understand the implications of GST in their line of work. Therefore, we will be publishing a series of posts that will cover one industry in each post.
In this particular post, we will focus on the Hospitality industry and the effects of GST on related business transactions and undertakings.
Industry scenario in the pre-GST era
The hospitality industry, like every other sector in the Indian economy, was liable to pay multiple taxes such as Value Added Tax (VAT), Luxury tax, and Service tax under the previous VAT regime. Understandably, compliance with these was a rather tedious and, in most cases, a costlier process.
To elaborate, let us look at an example:
- A hotel where the room tariff exceeded INR 1,000, was liable for Service tax at 15%.
- An abatement of 40% was allowed on the tariff value, thus bringing the effective rate of Service tax down to 9%.
- The Value Added Tax (ranging between 12 to 14.5%) and Luxury tax, was applied over and above this.
- However, for restaurants, there was 60% abatement, which implied thatthe Service tax was charged at an effective rate of 6% on the Food & Beverages (F&B) bills, apart from a VAT at 12 to 14.5%.
- On the other hand, bills for bundled services such as social functions (seminars, marriage etc.), were taxed with an abatement of 30%.
- Consequently, the cascading effect of the VAT regime where the end consumer paid a tax on tax, increased the end cost.
- Hoteliers and hospitality businesses did not get any Input Tax Credit on the taxes they paid, as Central taxes such as Service tax could not be set off against State taxes (VAT) and vice-versa.
Revolution seen in a post-GST industry scenario
GST was primarily introduced to standardize tax rates and implement uniform rates on applicable items in a categorized manner. Under GST, the hospitality sector now stands to reap the benefits of such standardized and uniform tax rates, as well as easily and more efficiently utilize Input Tax Credit (ITC).
Additionally, services that were earlier taxed separately under the VAT regime (such as the complimentary breakfast), are now taxed as a bundled service under GST.
Let us have a look at the implication of GST with reference to the same example given above. Under GST, the rates for the hospitality industry are:
|Tariff Per night||GST Rate|
|Lesser than INR 1,000||No tax applicable|
|INR 1,000 – INR 2,500||12%|
|INR 2,500 – INR 7,500||18%|
|More than INR 7,500||28%|
Consequently, the final cost to the consumer effectively decreases as well as is logically more proportionate to spending capacity of the people.
Impact on the Indian economy
As an outcome of the lowered costs to end consumers, we can expect an increase in the consumption of services in this industry. At the same time, with compliance and regulatory hurdles easing out, we can hope to see a lower churn and increased profitability for the business owners. Both aspects combined, will result in distinct long-term benefits and possibly result in an increased contribution to the GDP by this sector.
To summarize on a high level, we can say that the benefits of GST in the hospitality industry are:
- Ease of claiming and availing Input Tax Credit (ITC) – including full ITC on inputs. Previously, the taxes paid on inputs (such as raw edibles for food, cleaning supplies, etc.) could not be adjusted against the output without any complications. However, this is easily achievable under the GST regime.
- Abolishment of several other taxes, leading to a reduction in procedural steps, and possibilities to streamline the taxation process.
However, there do remain some aspects of the industry that are yet to be addressed under GST or where the advent of GST has caused some amount of issue; specifically:
- Liquor is not yet subsumed under GST. Therefore, serving alcoholic beverages in hotels will imply charging VAT and Service Tax
- As filings are now to be done monthly, the compliance burden has increased from an execution standpoint as separate records need to be maintained
The introduction of GST has resulted in savings for all the foodies in the country, because of the minimal rate of 5%); and at the same time charging a rate of 28% on luxury items has positively impacted the Government’s coffers.
GST aims to provide a single window for all compliances, with an efficient and harmonized destination-based tax system. Designed to mitigate the challenges and higher costs to faced by businesses and consumers in the hospitality industry, GST can inevitably lead to cost optimization and a free flow of transactions.
Written by Bharat Dhingra
Bharat Dhingra is an executive in the Financial Accounting Services team, specializing in GST-related accounting and compliance.