Introduction
The Federation of Hotel & Restaurant Associations of India (FHRAI) has urged the government to reform the current Goods and Services Tax (GST) structure on food and beverage (F&B) services in hotels. Presently, restaurants in hotels where room tariffs are below ₹7,500 attract 5% GST without Input Tax Credit (ITC), whereas those exceeding this threshold are subjected to 18% GST with ITC. This linkage, according to FHRAI, negatively impacts the industry and limits growth.
Key Issues with the Current GST Structure
- Room Tariff Threshold Impacts GST Rates on F&B
- Hotels with room rates exceeding ₹7,500 must charge 18% GST on F&B, leading to an inconsistent tax burden.
- This discourages hotels from raising tariffs, affecting revenue growth.
- Inflationary Impact Since 2017
- The ₹7,500 threshold was set in 2017 and has not been revised for inflation.
- FHRAI suggests raising the threshold to ₹12,500 to reflect current market conditions.
- Limited Flexibility in Taxation Choices
- Hotels should have the option to choose between 18% GST with ITC or 5% GST without ITC, irrespective of their room rates.
FHRAI’s Proposal for GST Reform
FHRAI proposes two key reforms to ensure fair taxation and sustained growth in the hospitality industry:
| Proposal | Expected Impact |
|---|---|
| Delink GST on F&B from Room Tariffs | Provides stability in pricing and taxation for hotel restaurants. |
| Increase Room Tariff Threshold to ₹12,500 | Adjusts for inflation, allowing hotels to remain competitive. |
| Allow Hotels to Opt for Either 5% GST (No ITC) or 18% GST (With ITC) | Creates a level playing field and enables better tax planning. |
Potential Benefits of GST Delinking
1. Revenue Growth for the Government
FHRAI argues that hotels opting for 18% GST with ITC will contribute higher tax revenues as they won’t shift to lower tax brackets.
2. Increased Competitiveness for Hotels
Removing the GST linkage will allow premium hotels to set room rates based on demand without tax-related constraints.
3. Better Compliance & Transparency
Hotels will have more flexibility in compliance without manipulating tariffs to avoid higher tax brackets.
Industry Outlook: Hospitality Sector on a Growth Path
According to the Ministry of Tourism, India currently has 417 five-star and five-star deluxe hotels, all of which house multiple restaurants. The hospitality sector has exceeded pre-pandemic levels and is expected to grow significantly in the coming years, making tax reform crucial.
Legal and Regulatory Considerations
1. GST Council’s Role
- The GST Council has the authority to revise tax structures based on industry recommendations.
- Any changes must be ratified through official notifications.
2. Potential Legal Precedents
- Past Supreme Court rulings emphasize fair taxation policies and ensuring business growth without undue burdens.
Conclusion
The FHRAI’s demand to delink GST on F&B from hotel room tariffs is a logical step toward simplifying taxation and fostering industry growth. Adjusting the ₹7,500 threshold to ₹12,500 and offering hotels the flexibility to choose their GST structure would not only boost government revenues but also create a fairer system for businesses and consumers alike.