In 2018, India's Hospitality Industry, valued at $234 billion, was the largest service industry in the country. With revenues of $29.962 billion from January to December 2019, the business has become one of India's top foreign exchange earners, representing a 4.8% increase over the previous year. In 2019, the hospitality industry contributed to over 6.8% of the country’s GDP. This industry contributed to 8% of the total employment in our country by directly and indirectly generating over 39.8 million jobs. India is also one of the top tourist destinations for foreigners. Its rich heritage, diverse population and mouthwatering food attracts almost 18 million tourists in 2019. The Indian tourism industry, both domestic and international, is continuing to grow even today.
But how the implementation of GST impacted the hospitality industry?
Experts believed that GST implementation on the hospitality industry would boost the industry by simplifying taxation procedures. They also believed that it would bring down various costs like transaction costs and customer costs. However, there are certain problems associated with the same, and to understand the problem better, we need to understand how the taxation system in the hospitality industry looked before the GST regime and how it looked post the implementation.
Pre GST regime:
Before the implementation of GST, different states had a slight variation in their taxing system. Under the former VAT regime, the hospitality industry used to pay several taxes, including service tax, luxury tax, and VAT. All the lodging rooms with overnight charges over Rs. 1000 paid 15% VAT. However, a 40% abatement allied to the tariff value brought down the effective service tax to 9%. But VAT and luxury tax were applied on top of this.
A 60% abatement meant that the effective service tax rate came down to 6% when it came to restaurants. However, on top of this, VAT was charged. Services like social gatherings (seminars, weddings, etc.) were taxed with only a 30% abatement.
Because central taxes, such as service tax, could not be offset against state taxes (VAT) and vice versa, hoteliers and hospitality firms could not receive any Input Tax Credit on the taxes they paid.
The whole tax system, as seen above, was complex, confusing and made the end customers pay tax on tax. There was a need to simplify the whole taxation system.
Impact of GST on hospitality industry:
The implementation of GST made the tax system less confusing, at least in the travel and tourism industry. The hospitality industry stands to profit from the Goods and Service Tax because of the harmonised and consistent tax rates and the easier and improved usage of the input tax credit. The industry is attracting more international travellers than ever before as the ultimate cost to the end consumer falls. Experts also believe that the impact of GST on the hospitality industry in India has been more beneficial than most other industries. Ideally, this will translate into better revenue for the government, and this new tax system has many advantages that can help the industry develop in the long term. However, there are still some issues with respect to the same. Let us take a detailed look at both the pros and cons of GST implementation on the hospitality industry.
1. Simplified procedure:
With the implementation of GST, various redundant taxes like VAT and service taxes were eliminated on paper to simplify the process. Thereby it reduced procedural steps and cut down on transactional costs.
2. Better understanding:
Before the implementation of GST, some customers, especially foreign tourists, found it hard to understand the difference between various taxes that were levied. For ordinary people, it is sometimes difficult to distinguish between the value-added tax and the entertainment tax. With GST in place, the customers got a better understanding of the tax system.
3. Improved service quality:
With one single tax post-implementation, the billing procedure has become more accessible and quicker, saving time. In the pre-GST era, customers had to spend a lot of time in hotel checkouts because of the multiplicity of taxes. Sometimes customers were also cheated in the name of taxes. Now, the scope for the same has immensely reduced.
4. Input tax credit:
With the implementation of GST, it would become easier for the hospitality industry to claim Input Tax Credit. Before the implementation of the goods and services tax, taxes paid on cleaning products and raw foods could not be easily adjusted based on production. However, the new GST system will eliminate the various complexities that existed in previous tax methods.
1. Need for more reduction.
Undoubtedly, GST, in comparison to multiple taxes during the VAT regime, has brought the tax rate down. But India has still not matched the international standards. Due to significantly low taxes on tourists, countries like Singapore have become the most sought-after tourist destination. India is definitely growing rapidly as a tourist-favourite nation. But to increase the pace, the government further needs to reduce the tax rates. This might reduce the tax receipts of the government. However, experts believe that an increase in tourists due to reduced tax would easily compensate for the reduced tax receipts. After all, in economic terms, everything is a trade-off.
2. Reliability on technology:
There was a lot of confusion when the service tax was first introduced. On the contrary, GST has unambiguous guidelines on how each industry should manage its accounts and submit returns. However, compared to the VAT regime, GST tax filing requires companies to be proficient in technology. In India, various tourism businesses are from rural areas, and even some urban businesses are not comfortable with the technical requirements that GST tax filing demands. In order to get the job done, they need to improve their proficiency or hire people who can get the job done. Both these alternatives increase the technical burden and compliance costs.
India has come a long way in attracting tourists worldwide to become a leading tourist destination. The complex tax procedure that existed before has been by-large abolished. The new simpler GST (Goods and Service tax) has made the whole procedure simpler, quicker and more efficient, reducing costs and time spent and increasing quality. However, the technological burden is acting as a minor barrier towards the goals which GST intends. If small businesses overcome the barrier to learning the technology required and the new procedure, they would aid the government in GST execution and make India a more tourist-friendly place.
1) Everything You Need To Know About Your GST Number
2) Are You A Business Owner Buying A Property?
3) How to Register for GST on your Own? A Complete Guide
4) What Happens When You Don't Pay GST for your Business?
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Q. Is the GST applicable for accommodation different from GST applicable in restaurants?
Ans. Yes, The GST rate for accommodation in hotels with a per-day tariff less than Rs. 1000 is nil, between Rs. 1000 to 2500 is 12%, above Rs.2500 is 18% and above 7500 is 28%. For restaurants, it is 12% for the ones that do not have air-conditioning facility or license to sell liquor. If otherwise, the GST rate applicable in restaurants is 18%.
Q. Is GST applicable on air travel and rail travel?
Ans. The GST rates applicable on air travel has been divided into two categories. For the Economy class, it is 5%, and for classes other than Economy, it is 12%. For rail travel, GST is applied only for First Class travel and air-conditioned travel (5%). For a ticket in the sleeper class coach or general compartment, no GST is applicable.