GST Update No. 230 on impact of withdrawal of exemption to hotel industry

Recent meeting convened by the GST Council has proposed many changes in the rate structure wherein certain exemptions have also been withdrawn. One of the exemptions that has been withdrawn pertains to services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having value of supply of a unit of accommodation below one thousand rupees per day or equivalent. The GST Council has proposed tax of 12% on such accommodation services to be notified from the date of notification issued in this regard. The present update seeks to discuss the implications of this proposed amendment.

Presently, no GST is attracted on hotel rooms wherein the value of supply of a unit of accommodation was below Rs. 1000/- per day. Consequently, the hotels were under a liability to reverse the proportionate common input tax credit availed on these rooms as such rooms are exempted supply of services.

There was always a tussle between the departmental authority and the assessee as regards the credit to be considered for the purpose of reversal as on one hand, revenue authorities contend to include remote input services in the computation such as maintenance of computers, banking services, consultancy services, security services etc. but on the contrary, the assessee pleads that the common input services such as telephone, wifi services which can be attributable to the accommodation services and are common in nature should be considered. The decision to levy tax on the accommodation services will obliviate the requirement of proportionate reversal of common credit which is a herculean task for the assessees.

Besides this, the above proposal will enable the assessees to avail input tax credit of the tax paid which will lead to extension of credit facility both to the suppliers and the recipients. Apart from this, it was commonly observed that in order to claim exemption from levy of GST on accommodation services, the hoteliers followed various malpractices such as splitting the value of accommodation services and restaurant services by way of raising separate invoices while the actual service was a composite supply of renting of rooms inclusive of complimentary breakfast. To illustrate, the value of room per day in a hotel being Rs. 1200/- was split as Rs. 950/- for accommodation and Rs. 250/- for restaurant services in order to avoid GST on Rs. 950/-. However, such practise will be curbed by introduction of GST rate of 12% on the rooms with value of supply below Rs. 1000/-.

It is also pointed that due to multiplicity of GST rates on hotel industry, the revenue authorities often dispute the tax liability discharged by the hotels. For instance, we know that restaurant services provided in a hotel having value of supply for room exceeding Rs. 7500/- per day is chargeable to 18% GST with ITC facility whereas the restaurant services in hotels having value of supply for room below Rs. 7500/- per day is leviable to GST at the rate of 5% without ITC. It is observed that many times, due to non-mention of number of days, the amount of invoice exceeds Rs. 7,500/- but actually the value of supply of room per day is below Rs. 1000/-. In such cases, revenue authorities seek to levy GST of 18% on the restaurant services for which assessee has to indulged in unwarranted litigation. Therefore, it is suggested that when the exemption from the levy of GST on rooms having value of supply below Rs. 1000/- per day has been withdrawn, the restaurant services provided by hotels should be allowed to avail input tax credit so that there is no confusion as regards reversal of credit required to be done by the assessees and there is seamless flow of input tax credit.

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GST Update No. 230 on impact of withdrawal of exemption to hotel industry

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