GST Relief to Hotels and Restaurants: Analysis of 55th GST Council’s decision

Decision:

To omit the definition of declared tariff and suitably amend the definition of specified premises (from the services rate and exemption notifications) to link it with actual value of supply of any unit of accommodation provided by the hotel and to make the rate of GST applicable on restaurant services in such hotels, for a given financial year, dependent upon the ‘value of supply’ of units of accommodation made in the preceding financial year, i.e. 18% with ITC if the ‘value of supply’ exceeded Rs. 7,500 for any unit of accommodation in the preceding financial year, and 5% without ITC otherwise.

Further, to give an option to pay tax on restaurant service in hotels at the rate of 18% with ITC, if the hotel so chooses, by giving a declaration to that effect on or before the beginning of the financial year or on obtaining registration.

The above changes to be made effective from 01.04.2025 to avoid any transition difficulties.

Our Comments:

The current rate of GST in restaurants are as under -

1. The rate of GST to be charged by a restaurant is 5% incase it is a standalone restaurant and no ITC is available to it.

2. The Rate of GST to be charged by a restaurant which is located in a hotel is as follows–

1. 5% incase the hotel does not sell even one room at more than Rs.7500/- in the same FY
2. 18% incase the hotel sells even one room at more than Rs.7500/- in the FY

Consider the example - Incase the hotel sells a room on 31^st March 2025 at say Rs.8000/- then its entire restaurant sale from 1^st April 2024 would be 18% (with ITC) and not 5% (without ITC). This would be hit by doctrine of impossibility as how would the hotel know on 1^st April 2024 that it would be selling a room over Rs.7500/- on 31^st March 2025. Further, once it gets to know on 31^st March 2025, then the recipient of the service is untraceable and the hotel has to pay the differential 13% GST (less ITC) out of its own pocket.

This is proposed to be corrected from 1^st April 2025. i.e. GST applicable on restaurant services in such hotels, for a given financial year, would be dependent upon the ‘value of supply’ of units of accommodation made in the preceding financial year, i.e. 18% with ITC if the ‘value of supply’ exceeded Rs. 7,500 for any unit of accommodation in the preceding financial year, and 5% without ITC otherwise.

So Consider the same example as supra after 1^st April 2025 - Incase the hotel sells a room on 31^st March 2025 at say Rs.8000/- then its entire restaurant sale from 1^st April 2025 would be 18% (with ITC) and not 5% (without ITC). This would bring certainty in taxation to the hotel.

Further, the hotels would be give an option to pay tax on restaurant service in hotels at the rate of 18% with ITC, if the hotel so chooses, by giving a declaration to that effect on or before the beginning of the financial year or on obtaining registration.

It is understood that the modus-operandi to change from one option to another year-on-year would also be out.