The Federation of Hotel & Restaurant Associations of India (FHRAI) has taken a significant step towards addressing long-standing GST-related issues in the hospitality sector. In a recent move, the association has submitted a comprehensive representation to Finance Minister Nirmala Sitharaman, outlining key areas for GST reforms that could potentially reshape the tax landscape for hotels and restaurants across India.

Key Proposals by FHRAI

1. Regularization of Past GST Dues

• Addressing interpretational disputes since GST implementation in 2017
• Focus on 'declared tariff' versus 'transaction value' discrepancies
• Tackling inflated rates from online travel agencies

2. Restoration of Input Tax Credit (ITC) Benefits

• Current scenario: Hotels with room tariffs below ₹7,500 face 5% GST without ITC
• Proposal: Restore ITC benefits to reduce operational costs

3. Revision of Tariff Threshold

• Current threshold: ₹7,500
• Proposed threshold: ₹12,500
• Aim: Provide more flexibility in pricing, especially during high-demand periods

4. Reclassification of Hotel Rooms

• Proposal: Recognize hotel rooms as 'plant and machinery' for credit eligibility

5. Delinking Restaurant GST Rates from Hotel Room Tariffs

• Current system: Restaurant GST rates linked to hotel room tariffs
• Proposal: Allow all hotel-based restaurants to choose between:
  • 18% GST with ITC
  • 5% GST without ITC
• Benefit: Flexibility regardless of room pricing

Potential Impact

According to a study conducted by FHRAI's research center, implementing these reforms, particularly relaxing the ₹7,500 threshold, could have a significant fiscal impact:

This projected increase is attributed to the additional pricing flexibility that mid-segment hotels would gain during high-demand periods.

Industry Implications

The proposed reforms aim to address several pain points in the hospitality sector:

1. Operational Cost Reduction: Restoration of ITC benefits could significantly lower operational expenses for hotels, especially in the mid-segment.

2. Pricing Flexibility: Raising the tariff threshold to ₹12,500 would allow hotels to adjust their pricing more dynamically, particularly during peak seasons.

3. Simplified Tax Structure: Delinking restaurant GST rates from hotel room tariffs would create a more uniform and flexible tax environment for hotel-based eateries.

4. Past Dispute Resolution: Regularization of past GST dues could help resolve long-standing conflicts between the industry and tax authorities.

These proposed changes, if implemented, could potentially lead to a more robust and competitive hospitality sector in India. The FHRAI's proactive approach in presenting these reforms demonstrates the industry's commitment to working with the government to create a more favorable business environment while potentially increasing tax revenues.

As the hospitality sector awaits the Finance Ministry's response, these proposals could mark a significant turning point in the GST framework for hotels and restaurants across the country.

The Federation of Hotel & Restaurant Associations of India (FHRAI) has called on the GST Council to reevaluate its recent changes to hotel taxation, citing potential negative impacts on the hospitality sector's financial health.

GST Rate Reduction and ITC Withdrawal

The GST Council recently implemented changes that reduced the Goods and Services Tax (GST) rates on hotel rooms priced below ₹7,500 per night from 12% to 5%. However, this reduction came with a significant caveat - the withdrawal of input tax credit (ITC) benefits for these establishments.

Financial Implications for the Hotel Industry

FHRAI warns that the withdrawal of ITC benefits could have severe consequences for the sector. Hotels now face the challenge of absorbing unrecoverable 18% GST on various operational aspects, including:

• Rentals
• Manpower
• Maintenance
• Utilities
• Capital expenditure

To illustrate the potential impact, the association provided an example: a ₹1 crore refurbishment project would now incur an additional ₹18 lakh in unrecoverable GST burden, significantly straining the liquidity of hotel businesses.

Competitiveness Concerns

K. Syama Raju, President of FHRAI, expressed concern that this move threatens the competitiveness of the Indian hospitality sector, particularly affecting small and mid-scale hotels. The increased cost burden could make it challenging for these establishments to maintain competitive pricing while ensuring quality services.

FHRAI's Demands

In light of these concerns, the FHRAI has put forward several demands to the GST Council:

1. Restoration of Input Tax Credit benefits
2. Delinking Food & Beverage (F&B) services from room tariffs for tax purposes
3. Recognition of hotel rooms as 'Plant & Machinery' to make them eligible for ITC
4. Regularization of past GST dues
5. Increase in the 18% GST threshold from ₹7,500 to ₹12,500 per night

Industry Impact

The hospitality industry, already grappling with the aftermath of the pandemic, views these taxation changes as an additional challenge. The FHRAI's appeal highlights the delicate balance between reducing consumer-facing tax rates and maintaining the financial viability of businesses in the sector.

As the situation develops, the industry awaits the GST Council's response to these concerns, hoping for a resolution that supports both the growth of the hospitality sector and the government's revenue objectives.