GST reductions applauded by FHRAI, yet they caution that ITC removal may strain budget accommodations in the hospitality sector
The Federation of Hotel & Restaurant Associations of India (FHRAI) has urged the GST Council to reinstate the Input Tax Credit (ITC) on hotel tariffs below INR 7,500, warning that the withdrawal of ITC inflates costs for budget and mid-scale hotels, threatens their financial viability, and undermines the core GST principle of seamless credit flow.
The GST Council's recent decision to reduce the goods and services tax on hotel rooms priced below 7,500 rupees a night from 12% to 5% has been met with mixed reactions from the hospitality industry. While the reduced tax rate is a step towards making India a more affordable destination for tourists, it has raised concerns about the impact on the capital and working-capital requirements, stress on liquidity, and weakening of financial stability for hotels, particularly those in the budget and mid-scale segments.
FHRAI has highlighted that the removal of ITC will lead to an additional 18% tax burden on essentials like rentals, outsourced manpower, utilities, and maintenance. This burden is expected to erode margins and deter reinvestment, potentially putting the growth and competitiveness of India's hotel sector at risk.
To address these concerns, FHRAI has proposed several measures. They have called for delinking food and beverage services from room tariffs, clearer transition rules for accumulated credits, and recognition of hotel rooms as 'plant and machinery' to make renovation costs eligible for tax credits.
In addition, FHRAI has requested the GST Council to address the threshold issue and regularize past dues that arose from ambiguities in GST rules rather than deliberate evasion. They have also asked for the ceiling for the 18% GST rate to be increased from 7,500 rupees to 12,500 rupees, citing inflation and currency depreciation since 2017 as factors that have reduced the threshold's real value.
The association has expressed guarded approval towards the tax reduction but has emphasised the need for these measures to ensure the financial sustainability of small and mid-scale hotels. Without ITC, a refurbishment project worth 10 million rupees would now carry an additional 1.8 million rupees in unrecoverable taxes, a significant burden for many in the industry.
The hospitality industry stands committed to supporting the government's vision of making India a global tourism hub. However, they stress the importance of a balanced approach that considers the needs of all segments of the industry to ensure a thriving and competitive hospitality sector in the long term.
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