Budget Hotels Face GST Shake-up: 5% Rate Mandatory Without Input Tax Credit from September 2025

The Indian hospitality sector is bracing for a significant tax policy change that will impact budget and mid-market hotels starting September 22, 2025. The Central Board of Indirect Taxes and Customs (CBIC) has issued a clarification that will alter the Goods and Services Tax (GST) structure for hotels charging ₹7,500 or less per room per day.

Key Points of the GST Clarification

• Hotels with room rates of ₹7,500 or less per day must levy a 5% GST rate.
• These hotels will no longer have the option to choose an 18% GST rate with Input Tax Credit (ITC) benefits.
• The new rule takes effect from September 22, 2025.

Impact on Hotels

The clarification brings both certainty and challenges for the hotel industry:

Mandatory 5% GST Rate

Hotels cannot opt for a higher tax rate to avail ITC benefits for rooms priced at or below the ₹7,500 threshold.

Loss of Input Tax Credit

Hotels will be unable to claim ITC on various operational expenses, including:

• Housekeeping services
• Food and beverages
• Maintenance costs

Potential Margin Pressure

The inability to offset taxes on inputs may lead to increased operational costs, potentially squeezing profit margins for budget accommodations.

Implications for Travelers

While the GST rate remains unchanged for budget-conscious travelers, the policy's effects on hotels may indirectly impact guests:

• Travelers booking rooms under ₹7,500 per night will continue to pay the lower 5% GST rate.
• However, hotels may need to adjust their pricing strategies to compensate for the loss of ITC benefits.

Industry Outlook

The timing of this clarification is particularly significant as it comes ahead of the peak festive and wedding season in India. Budget and mid-market hotel segments, which form a substantial portion of the Indian hospitality market, will need to reassess their pricing and operational strategies to adapt to these changes.

Industry experts suggest that while the consistent 5% GST rate might simplify tax compliance for smaller hotels, the loss of ITC could lead to challenges in managing costs effectively. Hotels may need to explore innovative ways to optimize their operations and maintain competitive pricing in light of these regulatory changes.

As the September 2025 deadline approaches, the hotel industry will be closely watching how this policy shift affects market dynamics and consumer behavior in the budget accommodation sector.