India’s hospitality sector is adjusting to the latest Goods and Services Tax (GST) reforms, which aim to simplify taxation and make mid-range hotel stays more affordable. While guests are seeing lower bills, hoteliers warn that the new system has added new cost pressures, especially for mid-market and regional properties that are crucial to India’s domestic tourism.
Starting September 22, 2025, hotel rooms priced up to INR 7,500 per night will be taxed at 5% GST. Rooms above that price will incur 18% GST with full Input Tax Credit (ITC). This policy, introduced at the 56th GST Council meeting, seeks to improve affordability and adjust tax rates across the hospitality sector.
However, the lower rate has a downside: hotels in the sub-INR 7,500 category cannot claim ITC, meaning they cannot recover the GST paid on expenses such as rent, utilities, maintenance, and outsourced services. Consequently, the 5% tax, although it appears manageable, has become a cost that further reduces already tight operating margins.
The New Tax Structure
Under the revised structure, a hotel room priced at INR 6,000 per night now incurs INR 300 in GST, down from INR 720. This results in a savings of INR 420 for guests. For premium hotels with rates above INR 7,500, the GST remains at 18%, along with ITC benefits, allowing them to offset taxes paid on inputs.
Industry stakeholders describe this as a two-tier system that helps consumers and luxury operators but puts budget and mid-scale hotels at a disadvantage. The lack of ITC has resulted in what hoteliers call a “cascading tax effect,” in which multiple layers of tax increase the cost without any mechanism for credit recovery.
According to the Federation of Hotel & Restaurant Associations of India (FHRAI), nearly 90% of Indian hotels fall within the sub-INR 7,500 range. Most of these properties are found in Tier-II and Tier-III cities and mainly serve domestic travelers, small businesses, and events, supporting over 60 million livelihoods directly and indirectly.
Guests Benefit but Operators Absorb the Strain
“The post-GST reforms have brought a balanced impact for both guests and the hospitality sector. There’s no significant loss in revenue, and guests are benefiting from more transparency and fair pricing,” said Vijay Patidar, Finance Manager at Sheraton Grand Palace Indore. “We’re also seeing better room occupancy rates, as the new structure improves affordability and demand,” he added.
But smaller and independent operators say the situation is different. For them, not being able to offset GST paid on rent, electricity, housekeeping, and outsourced manpower has created a hidden cost center. Hotel consultants note that such unrecoverable taxes can raise operational costs by 3–5% each year. This is significant in an industry where profits often stay below 10%. In smaller cities, where rates are limited by local demand, this could mean the difference between growth and stagnation.
FHRAI’s Stand
The FHRAI has asked the government to reinstate ITC for the 5% slab or allow hotels to choose to charge 18% GST with ITC, ensuring fairness across categories. “Our industry is one of the biggest sources of jobs and a key part of India’s service economy. Yet, the GST system without ITC has created imbalances that threaten our competitiveness. We seek fairness, clarity, and equal treatment. By restoring ITC and addressing copyright issues, the government can help hospitality support the vision of Viksit Bharat 2047 and establish India as a global tourism hub,” said Surendra Kumar Jaiswal, the new president of FHRAI.
The association has also requested clarifying circulars from the Central Board of Indirect Taxes and Customs (CBIC) to eliminate compliance issues that smaller operators face, particularly regarding bundled services and restaurant operations within hotels. FHRAI has reinforced its long-standing call for Infrastructure and Industry Status for hospitality, which would enable low-cost financing and encourage investments in underdeveloped tourism destinations.
Restaurants and F&B Services Under Dual Rates
The reforms also impact restaurants and catering operations within hotels. According to GST rules, properties classified as “specified premises”—where at least one room exceeds INR 7,500—face 18% GST with ITC on food and beverages. Non-specified premises are taxed at 5% without ITC.
For hotels managing both types, compliance becomes complex as they must keep separate accounts and proportionate ITC calculations for shared expenses like utilities, maintenance, and administration, as per Rule 42 of the CGST Rules. Experts say this complexity could overwhelm smaller operators lacking solid accounting systems, leading to unintentional non-compliance or credit losses.
The Balancing Act
Policy analysts note that the government must strike a delicate balance: keeping a straightforward, consumer-friendly GST system while ensuring that the tax structure is fair for businesses. Restoring ITC or offering a dual-option model could meet both goals by allowing hoteliers to choose between 5% without ITC and 18% with ITC, depending on their business model. Experts argue that such flexibility would maintain affordability for consumers while allowing operators to pursue growth.
As India envisions a Viksit Bharat 2047, tourism is expected to remain a vital growth pillar. Ensuring that the tax framework supports both affordability for travelers and viability for operators is essential. For now, the GST reform is a step toward transparency and standardization, but it comes with trade-offs. For guests, hotel stays have become slightly cheaper. For hoteliers, especially in the mid-market segment, the real challenge will be absorbing these costs without sacrificing service, sustainability, or growth.
