The Impact of GST on the Tourism and Hotel Industry: A Double-Edged Sword

Does GST bring benefits or burdens to the tourism and hotel industry?

Introduction

Every industry has faced the impact of the Goods and Services Tax (GST) reform, and the tourism and hotel industry is no different. Like a coin has two sides, GST has brought both advantages and disadvantages to this sector. This article explores the pros and cons of GST in the tourism and hotel industry, providing a comprehensive analysis for stakeholders.

Pros of GST in the Tourism and Hotel Industry

1. Unified Tax Structure: One of the most significant advantages is the introduction of a unified tax structure. Gone are the days of multiple taxes; a single tax system is expected to simplify compliance and reduce complexities for businesses. The proposed tax rate range between 16-18% is likely to encourage more tourists to visit India.

2. Increased Revenue for State Governments: The place of supply is shifted to the place where immovable property is situated, benefitting states with a concentration of hotels, restaurants, and tourist attractions. This shift in tax collection is expected to increase state revenues, specifically through State Goods and Services Tax (SGST) which is equivalent to Central Goods and Services Tax (CGST).

3. Cost Reduction in Food and Beverage Operations: Food and beverage companies, a crucial aspect of the hospitality sector, are expected to see significant savings. The proposed tax rate reduction is anticipated to reduce the overall bills by 10-15%, making it more cost-effective for businesses to operate.

Cons of GST in the Tourism and Hotel Industry

1. Multiple Registrations: A centralised registration system means that service providers will need to register in each state where they operate. Although the government claims "One Nation, One Tax," the practical implementation is proving challenging. This multiple registration process increases administrative burden and compliance costs.

2. Increased Compliance Burden: The introduction of GST has led to a more cumbersome process for managing invoices and receipts. Each invoice and receipt will need to be uploaded into the system, a task that increases the burden on businesses. The complexity of credit matching under GST may also result in increased working capital requirements.

3. No Credit for Work Contract Services: The hotel sector spends a substantial amount of money on construction and renovation. Under the current system, the taxes on work contract services are not allowed as a credit when the services are not used for further supply. This is problematic and may have a cascading negative effect on the industry. Additionally, B2B transactions may face increased burdens if suppliers of goods or services are made liable to pay tax under the reverse charge mechanism.

4. Exclusion of Liquor: The exclusion of liquor from the GST regime has been a contentious issue. Excluding essential elements of hospitality from GST could disrupt the seamless credit flow and affect the overall efficiency of the tax system.

Impact on Consumers

1. Relief in Pricing Structure: In the pre-GST era, the composite levy of Service Tax at 6% and Value Added Tax (VAT) at 14.5% made the final cost for consumers 20.5%. However, post-GST, the scenario is likely to improve. Restaurants will be charged only 18% GST on the supply of services, which is a significant reduction in the previous regime. Non-AC restaurants, which were exempt from service tax, will now be charged at 12% under the GST regime.

2. Increased Costs for Hotel Stays: The cost of staying in a hotel is expected to rise as the tax rate will double from 9% to 18%. Luxury hotels with room rentals above Rs. 7500 will attract 28% GST. While this may put more strain on consumers, it is expected to generate more revenue for the state governments.

Conclusion

The implementation of GST in the tourism and hotel industry is a step towards a harmonized and efficient tax system. However, the success of this reform heavily depends on the rate of GST and the ease of implementation. If the GST rate is kept between 10-15%, it could bring significant benefits to the sector in terms of cost optimization and improved service utilization. Ensuring clear and effective implementation is crucial for the industry's growth and prosperity.