GST: Mass and mid-market hotels set to benefit

GST exemption for small hotels and lower tax for budget hotels are welcome steps

The goods and services tax (GST) is finally in force. While the new tax regime will ultimately deliver what it set out to do — establish a uniform tax, simplify collection, bring in greater transparency and revenues and facilitate ease of doing business —it is not without hiccups. 

For budget hotel rooms charging less than Rs 1,000, zero per cent GST is most welcome. For small hotels offering rooms in the Rs 1,000 to Rs 2,499 bracket, too, the 12 per cent GST slab is reasonable. These tax rates will ensure that small hotels can continue upgrading room quality and infrastructure and provide a better experience to mass-market travellers. However, while GST slabs for specific price brackets are uniform across the country, the impact will not be the same. This is because different states levied different taxes earlier. In Odisha, there was no luxury tax and nine per cent service tax. Therefore, hotels in Cuttack or Bhubaneswar that were taxed at nine per cent earlier, will now attract 12 per cent GST. So, a uniform tax does not mean standard impact across India thanks to previous tax distortions.

Complex compliance

There is the issue of compliance complexity. The government has clarified that companies will have flexibility in filing during the first two months. Yet, multi-level filings mean a huge increase in the time and effort required for filings. So, compliance will be taxing (pun intended) till teething troubles are sorted out.

There is another sector-specific anomaly. As per a recent notification, the government has indicated that tax rate will be determined based on the published price. Like airlines, hotels operate in a cyclical environment — there are peak or leisure season and off-peak season and tariffs deviate significantly to accommodate customer demand. In fact, many hotels follow a dynamic pricing model to optimise their inventory and ensure better revenue management. In the new regime, the hotel industry is probably the only one where published or pre-discounted price would be used to determine the tax slab, instead of the actual price the room is charged at. It would be fairer (and much simpler from the standpoint of compliance and record maintenance) for tax to be computed on the invoice price, as in all other industries and services.

The other issue is of tax collection at source (TCS). In a situation where one hotel lists its properties on one online travel agency (OTA), which in turn lists on another OTA or platform, the current law is ambiguous, leading to TCS on the same transaction at multiple levels — that is, TCS by one OTA to another and then from OTA to hotel owner. However, credit of TCS is limited only to the person, who ultimately sells to the customer. This leads to loss of credit in the chain and is an unintended fallout. 

Employment and revenues

On the whole, GST will benefit small and mid-market hotels. With the former exempted and the latter attracting 12 per cent GST, this can be the game-changing moment for mass-market hospitality. The government’s decision to lower tax rates for budget hotels will help deliver better quality accommodation to millions of middle-class travellers, besides creating thousands of new jobs.

Additional tourist inflows can translate into millions of new jobs, benefiting all sections. As tourism spends generate multiple jobs in associated sectors, its cross-country positive impact will be tremendous. In 2016, the industry generated 40.3 million jobs, accounting for 9.3 per cent of the total jobs and placing the country second in total employment created. Significantly, these jobs also benefit unskilled and semi-skilled workers.

Since aspirations are rising in emerging India, delivering standardised accommodation for millions of middle-class tourists will stimulate more travel. As per the latest report of the World Travel and Tourism Council, India’s travel and tourism sector earned Rs 14.1 trillion ($208.9 billion) in 2016 — ranking seventh-largest globally in size —amounting to 9.6 per cent of gross domestic product (GDP). With hotels being the biggest contributor to tourism and the sector ranked the third-largest forex earner, the beneficial impact of lower taxes can ensure an escalating impact. The industry is expected to contribute $280 billion to India’s GDP by 2026 and will pass on the benefits of uniform taxation to travellers. 

The lower rates are in harmony with an inclusive agenda, so that hospitality services remain within the reach of common people. Ultimately, such rates will promote greater transparency and tax compliance, increasing revenues and thereby benefiting the industry, the nation and its people.

The author is founder and CEO of OYO