GST on room tariffs above Rs 7,500 per night slashed by 10 percentage points to 18% from earlier 28%

 

The Goods and Services Tax (GST) Council, in its vague wisdom, had set Rs 7,500 per night as the floor tariff for charging demerit GST rate. And so, hotel rooms booked at tariffs above that amount were considered luxury or demerit items and were straight off slapped with a GST of 28%.

Tourism is Not a Sin

Besides pinching the consumers’ pockets, not only was this skewed tax rate commercially detrimental to the hotel industry and the economy at large but was also far removed from the market reality of the sector. Going by today’s market, room tariffs above Rs 7,500 per night are in no way luxury. Also, such spending by consumers did not need discouragement for it to be bracketed with other demerit items such as tobacco, etc.

Manu Rishi Guptha, CEO, Niraamaya Retreats, is emphatic when he says tourism cannot be considered as a sin industry. He sees it as a necessity for the mental health of people.

“We should have never considered tourism as a sin industry. It is a necessity for mental health, which could be the biggest epidemic on this planet in a few years. It is already spreading like wildfire. A wellness-based holiday is not a luxury it is a necessity and the government has identified and acknowledged the need to consider it as an essential service,” he said.

Such a glaring anomaly in the categorisation of the hotel industry had led the hotel representative bodies to fiercely lobby with the government for its correction. On Friday (September 20), it seems, Finance Minister Nirmala Sitharaman, who chairs the GST Council, finally relented.

It’s a Neat Saving for You

In a sweeping move, she slashed the GST rate of 28%, currently applicable on room tariffs above Rs 7,500 per night, by 10 percentage points to 18%. For a better understanding of its impact, let’s take an example of a room with a tariff of Rs 8,000 per night (which is above Rs 7,500). At 28%, your tax component was Rs 2,240 on it. In one stroke, it will come down to Rs 1,440, giving you a neat saving of Rs. 800 per room per night.

This decision particularly impacts Niraamaya Retreats, whose rooms are priced above Rs 7,500 per night.

“We represent a luxury brand and our tariffs across the entire chain is above Rs. 7,500 per night. This (GST decision) suddenly makes an Indian holiday cheaper for both domestic and international travellers by 10%, which is the lowest rate over the last 5-7 years,” said Mr. Guptha.

The council has cut GST rates on lower room tariffs too. Rate on rooms with tariffs between Rs 1,001 per night and Rs. 7,500 per night has been rationalised to 12% from the existing 18%. Currently, this bracket of room tariffs has two rates; GST for room tariffs between Rs 1,000 per night and Rs 2,455 per night is at 12% while for those between Rs 2,500 per night and Rs 7,500 per night it is 18%. Rooms sold below Rs 1,000 per night will continue to attract zero GST rate.

The hospitality industry has heaved a sigh of relief on the announcement, which is expected to boost the growth of the travel and tourism sector.

John Northen, executive vice president, Middle East, India, and the Indian Ocean, Shangri-La Group, expects the lowering and rationalisation of GST rates on hotel rooms to push up revenue and demand growth in the hospitality sector.

“We welcome this progressive initiative by the government. A lower GST rate for the luxury hotel sector will boost revenues and spur demand further among travellers. This, in turn, will cement India’s positioning as a hotspot tourist destination. The move will also increase the sectors’ contribution to the country’s GDP and foreign exchange,” he said in a statement issued by the luxury hotel.

An Important Spoke in Economy Wheel

The point to be noted from Northen’s comment is the significance of the tourism and travel industry in the Indian economy. With a contribution of $240 billion or 9.2% to the GDP and 8.1% to the total employment of the country in 2018 (as per the World Travel and Tourism Council), its economic importance cannot be underplayed.  In 2017, according to the Indian Brand Equity Foundation (IBEF), the direct contribution of tourism and hospital sector to GDP jumped by 23.6%.

Recent data have also shown demand for rooms has been consistently outpacing supply. According to WTTC, demand has been growing at around 6.8% while supply growth has fallen short at around 3% over the last few years. Such a shortfall of hotel rooms signals potential opportunity in the sector. Distorted GST rates on room tariffs could have killed this potential.

A report published by CARE Ratings in January says the average room rates (ARRs) is expected to grow at an average of 3.5-4.5% per annum. Madan Sabnavis, who has authored the report, expects the occupancy rate also to climb up to an average of 68-70% by FY23 compared with 66.6% in FY18. Further, the chief economist of CARE has forecast the room revenue to grow at the rate of about 10-12% CAGR over the next five years.

Room on the Roof

GST on Room Tariff

Room Tariff (per night) New GST Rate (%) Old GST Rate  (%)
Up to Rs 1,000 Nil Nil
Between Rs 1,000 and Rs2,499 12
Between Rs 2,500 and Rs 7,500 18
Between Rs 1,001 and Rs 7,500 12 18
Rs 7,500 and above 18 28

Contribution of travel and tourism to GDP

Year Contribution to GDP ($ billion)
2013 113.2
2014 125.21
2015 129.49
2016 208.9
2017 234
2018 240
2028* 492

*Forecast, Source: World Travel and Tourism Council

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