DE-MYSTIFYING GST ON PAYING GUEST ACCOMMODATION

1. The taxation of paying guest (PG) accommodations, hostels, and serviced residences has witnessed extensive litigation under GST. Between competing definitions of "residential dwellings," intermediary lease structures, and evolving rate notifications, businesses and operators have often faced severe interpretive ambiguities. The statutory roadmap, judicial milestones, and correct rate determination for hostel and PG operations are examined below.

2. The controversy initially centred on Entry 12 of Notification No. 12/2017-Central Tax (Rate), which exempted "Services by way of renting of residential dwelling for use as residence." In the The State of Karnataka & Anr. Versus Taghar Vasudeva Ambrish & Anr. - 2025 (12) TMI 505 - Supreme Court, the Hon'ble Supreme Court affirmed the ruling of the Hon'ble Karnataka High Court, settling crucial principles regarding student and professional accommodations covered by SAC 996311.

3. The Hon'ble Apex Court established that the exemption is purpose-centric rather than entity-centric. Even if a property owner leases a residential building to a corporate operator (like an aggregator or PG management company) who subsequently sublets it to students or working professionals, the fundamental character of the property remains a "residential dwelling" used for residential living. Restrictive subsequent amendments cannot be applied retroactively to disrupt bonafide past arrangements operating under the unconditioned statutory text.

4. To alter the judicial outcome of Taghar Vasudeva Ambarish ( supra), the GST Council implemented structured amendment. The relevant extract of the Notification No.04/2024-CTR dated 12th July 2024, is reproduced: -

The above entry providing exemption of tax has come into force with effect from the 15th day of July, 2024.

5.The CBIC Circular No. 228/22/2024-GST dated July 15, 2024 has issued clarification as regard to this issue--the accommodation must be provided for a minimum continuous period of 90 days.The past period from July 1, 2017, to July 14, 2024, was regularized on an "as is where is" basis for supplies meeting these two criteria. The relevant clarification of the CBIC is reproduced hereunder:

9. GST liability on certain accommodation services.

9.1 Representations have been received requesting to clarify whether service by way of hostel accommodation, service apartments/hotels booked for longer period is a service of renting of residential dwelling for use as residence and exempted under entry at SI. No. 12 of notification No. 12/2017-CTR dated 28.06.2017. Requests have also been received for GST exemption on hostels for poor and middle-class students run by charitable trusts.

9.2 The matter was placed before the GST Council in its 53rd meeting held on 22nd June, 2024 and the GST Council recommended to exempt the supply of accommodation services having value of supply less than or equal to twenty thousand rupees per person per month provided that the accommodation service is supplied for a minimum continuous period of ninety days. The same has been exempted w.e.f. 15.07.2024 vide notification No. 4/2024-CT(R) dated 12.07.2024.

9.3 In its 53rd meeting, the GST Council further recommended extending the benefit for past cases provided that value of supply of accommodation services supplied was less than or equal to twenty thousand rupees per person per month and that the accommodation service was supplied for a minimum continuous period of ninety days.

9.4 Thus, as recommended by the GST Council, GST liability on the supply of accommodation services is regularized on 'as is where is' basis for the period from 01.07.2017 to 14.07.2024 where value of supply of the accommodation service is less than or equal to twenty thousand rupees per person per month and the said accommodation service was supplied for a minimum continuous period of ninety days.

6.The typical prevalent model in PG accommodations involves a consolidated monthly fee covering both room stay and daily mess/boarding facilities. Where an all-inclusive tariff remains under Rs.20,000 per person per month for stays of 90 days or more. Accommodation bundled naturally with daily meals in the ordinary course of business constitutes a Composite Supply. The accommodation/residential stay represents the Principal Supply, while catering serves as an ancillary convenience. Under Section 8(a), the tax treatment of the principal supply governs the entire bundle. Consequently, the entire consolidated fee (inclusive of food) qualifies for exemption under Entry 12AA. So the tax authorities cannot dissect the composite contract to demand 5% restaurant GST on the food element, provided the boarding is not billed as a standalone, optional service. Because the entire composite supply is exempt, the operator of such PGs cannot claim Input Tax Credit (ITC) on procurement costs (mess provisions, maintenance, equipment) and must reverse common credit under Section 17(2) read with Rules 42 and 43 of the CGST Act/ Rules.

7. A widespread delusion among operators is that once an accommodation exceeds Rs. 20,000 per month person or involves stay of less than 90 days, it automatically attracts 18% GST because the "12% slab no longer exists." In my personal opinion, this understanding is incorrect. Under Notification No. 11/2017-Central Tax (Rate) (SAC Heading 996311), Entry No. 7(i) (12% rate with full ITC) covers hotel and commercial accommodation where the value of supply of a unit of accommodation is less than or equal to Rs.7,500 per unit per day or equivalent. Further Entry 7(vi) (18% with Full ITC) acts as the residual entry, applying only where the unit accommodation tariff exceeds Rs. 7,500 per unit per day.

8. To determine the tax slab for a PG charging more than Rs.20,000 per month, the tariff must be calculated on its daily equivalent: A monthly tariff of Rs.24,000 per person turns to Rs. 800 per day. A high-end luxury co-living charge of Rs.60,000 per person turns to Rs. 2,000 per day. Because both figures remain substantially lower than the statutory ceiling of Rs.7,500 per unit per day, such accommodations fall squarely under Entry 7(i) with full Input Tax Credit (ITC). The 18% rate applies strictly to high-end luxury hospitality units where the per-day tariff crosses Rs.7,500.00. Operators of PGs exceeding the Rs. 20,000 threshold or providing short-term stays--less than 90 days- are liable to collect and remit tax as prescribed under Entry No 7(i) of the Notification No. 11/2017-CTR (supra) while seamlessly availing ITC on their operational inputs and capital goods subject to Section 16(3) of the Act.

9.Without prejudice to the above legal position, input tax credit on goods or services received for construction/civil renovation of immovable property capitalized to the building account and specified motor vehicles is blocked under Section 17 of the Act.

Conclusion:

A. The GST jurisprudence surrounding student housing, paying guest accommodations, and co-living spaces has shifted from contentious subjective interpretations of "residence" to an objective, rule-based framework. The Hon'ble Supreme Court's ruling in Taghar Vasudeva Ambarish (supra) reaffirmed the supremacy of substance over form, ensuring that bonafide residential use could not be denied exemption merely due to corporate leasing structures.

B. While subsequent amendments under Notification No. 04/2024-CT(R) (supra) established specific statutory boundaries-capping the exemption at Rs. 20,000 per month for stays of continuous 90 days or more-the broader rate matrix remains fundamentally fair to business operations. Accommodations surpassing these exemption limits are not pushed into the 18% bracket; rather, they shift smoothly into the rate slab under Entry 7(i) with the complete benefit of Input Tax Credit. For industry stakeholders, recognizing this mathematical and statutory reality is essential to eliminate unwarranted tax exposure, ensure pricing transparency, and maintain seamless compliance across the hospitality and student/working professional-housing sectors.