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As part of the next generation Goods and Services Tax (GST) reforms announced late Wednesday, the GST rate on the mid and upper-mid segment hotel accommodation are set to reduce to 5 per cent from 12 per cent, a move that the travel and hospitality sector stakeholders believe will spur domestic travel and hotel demand by easing the tax burden for consumers in this volume-heavy accommodation segments. The hotel industry, however, is disappointed on a few counts, primarily the removal of the input tax credit (ITC) benefit on the reduced tax rate.
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The decisions taken by the GST Council in its meeting Wednesday effectively pave the way for a broad two-slab structure of 5 per cent and 18 per cent with a demerit rate of 40 per cent rate limited to super luxury, sin, and demerit goods. Nearly all the rate changes will take effect from September 22. The objectives of the GST reforms are to lower the tax burden on common people, ease blocked working capital, and facilitate ease of doing business with automated refunds and registration process.
Although the GST Council stopped short of fulfilling the travel and hospitality industry’s complete wish list, the rate rationalisation itself is being seen as a step to buttress demand in a sector that is a major employment generator. On air travel, while premium cabin classes like premium economy and business will see a higher tax incidence, there is no change in the tax on economy class fares, which is also being seen as a positive from the lens of accessibility and affordability of air travel for the common Indian.
As per a whitepaper released by the Confederation of Indian Industry (CII) and EY, the tourism and hospitality sectors contributed about 8 per cent of the total employment in India. Despite setbacks from the COVID-19 pandemic, the sector is witnessing a strong resurgence, fuelled by domestic tourism, and by 2036-37 spending in this sector is projected to rise by 1.2 times, driving the need for an additional 61 lakh workers, the whitepaper said, underscoring the sector’s pivotal role in workforce expansion.
A mixed bag for hospitality sector
The GST Council decided to reduce the tax rate of hotel rooms priced between Rs 1,000 to Rs 7,500 per day to 5 per cent without input tax credit from 12 per cent with input tax credit. The industry had urged for a 5 per cent rate with the benefit of input tax credit, apart from raising the tariff threshold beyond Rs 7,500 per day, which was set nearly seven years ago, to up to Rs 15,000 to accommodate for inflation in this mid-market segment that accounts for the highest volumes across segments. Only one of these wish list items was approved, and that too only partly. Nevertheless, the industry’s initial reaction has been broadly positive, accompanied by a few concerns.
“This is a timely and welcome reform that will make quality stays more accessible to a wider base of Indian travellers and at the same time strengthen the country’s positioning as a high-potential tourism hub. By reducing the tax burden on mid-scale and upper mid-scale hotels, the government has unlocked new opportunities for stronger domestic travel, weekend leisure breaks, and business mobility—factors that are critical to the hospitality sector’s growth. This move reflects a deep understanding of industry dynamics and traveller aspirations, and we are confident it will accelerate momentum across the hospitality landscape while reinforcing India’s ambition of becoming one of the world’s leading travel destinations,” said Nikhil Sharma, Managing Director & Chief Operating Officer, South Asia at Radisson Hotel Group.
MakeMyTrip’s Co-Founder and Group Chief Executive Officer Rajesh Magow said, “The rationalisation of GST slabs is a welcome move that will act as a stimulus to the Indian economy by boosting discretionary income and fuelling consumption across sectors. For travel and tourism, the cut in GST on hotel rooms priced below ₹7,500 will make stays more affordable for a large share of Indian travellers, reinforcing demand in the domestic market.”
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While agreeing that the budget and mid-scale hotels are expected to benefit from the rate reduction, industry body Hotel Association of India (HAI) expressed dissatisfaction over the removal of the ITC benefit and the Rs 7,500-per-day threshold for mid-market segment hotel rooms not being raised. Ahead of the GST Council meeting, HAI had said that the 18 per cent tax rate on hotel accommodation was “too prohibitive” and put at risk India’s competitiveness vis-à-vis other countries, and a tax rate reduction was warranted, along with aligning of tariff thresholds with inflation and global benchmarks.
“The structural reforms including reduction of the number of slabs were a need of the hour and are welcome. The rate on hotel accommodation priced at Rs 7,500 and below from 12% to 5% may provide some relief only to the travellers. Removal of ITC may in fact prove detrimental for hotel companies operating in the segment and may act as a disincentive for much needed investment and expansion in the category; the full impact on hotel operators will depend on the eDects of the ITC reduction, which experts will need to assess further. It would prove to be beneficial to retain the rate at 5% whilst allowing ITC, and we urge the Finance Minister to consider this progressively,” the association said in a statement.
GST on economy airfares unchanged, hiked for premium classes
As for flight tickets, the 5 per cent GST rate for economy class fares has been retained, but the tax on premium class fares will rise from 12 per cent to 18 per cent. However, industry insiders and experts don’t see the move as a negative, but as an encouraging sign that the central and state governments remain committed to making air travel more accessible for the common Indian, while asking the premium class passengers to cough up slightly more.
“…retaining a lower 5% GST on economy air tickets ensures affordability for the mass traveller, which is vital for sustaining the momentum in domestic tourism. While the upward revision for non-economy tickets may affect premium travel costs slightly, the overall framework reflects a balanced approach to making travel more accessible while supporting industry revenues. We believe these measures will drive higher occupancy, increase travel frequency, and further strengthen India’s position as one of the world’s fastest-growing travel markets,” said Ankit Pathak, Chief Finance Officer, Ebix Travels.
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According to Jitin Makkar, Senior Vice President and Group Head, Corporate Ratings at ICRA, the decision to keep GST on economy class fares unchanged is expected to ensure “continued affordability” of air travel in India.
“The GST on premium/ business/ first class air travel has been increased to 18% from 12%, which the airlines will pass on to the consumers. However, this should not have a significant impact on the business class segment considering this segment’s low price elasticity, though there could be some amount of downtrading to the economy segment. The GST rate for economy class tickets has been retained at 5%. By keeping rates stable for economy travellers, this measure is likely to ensure continued affordability, thus making air travel more accessible,” Makkar said.
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