Impact of Withdrawal of Exemptions on Hotel Accommodation Services - Govt delivers another shocker Post COVID

[Chitresh Gupta]

The hospitality and tourism industry has been witnessing a healthy growth number and accounted for 7.5% of the GDP. According to the Federation of Hotel & Restaurant Associations of India, in FY21, the hotel industry incurred losses of >Rs. 1.30 lakh crore (US$ 17.65 billion) in revenue. The industry witnessed the worst phase since the 2008 financial crisis as the revenue was almost zero. However, now post vaccinations, relaxation of travel restrictions along with pandemic lethargy, the sector is showing revival signs.

However, Govt in its 47^th GST Council meeting has delivered another shocker for hospitality industry. The government had earlier exempted services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having value of supply of a unit of accommodation below or equal to one thousand rupees per day or equivalent as per S. No. 14 of Notification No. 12/2017-Central Tax (Rate)/ S. No. 15 of Notification No. 9/2017-Integrated Tax (Rate) as amended from time to time.

However, the CBIC, in line with the recommendations made by the GST Council in its 47^th Meeting has withdrawn the aforesaid exemption and made the following services taxable under GST by way of Notification No. 04/2022-CT(R) dated 13-07-2022 by amending Notification No. 12/2017-CT(R) dated 28.06.2017 read with Notification No. 03/2022-CT(R) dated 13-07-2022 by amending Notification No. 11/2017-CT(R) dated 28.06.2017:

Notification No. 12/2017-CT(Rate) as amended vide Notification No. 04/2022-CT(Rate)
S. No	Heading	Description of Services	Rate	Condition
14	Heading 9963	Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having “value of supply” of a unit of accommodation below or equal to one thousand rupees per day or equivalent.	Nil	Nil

 

Notification No. 11/2017-CT(Rate) as amended vide Notification No. 03/2022-CT(Rate)
S. No.	Heading	Description	Rate [CGST]	Condition
7	Heading  9963  (Accommodation, food and beverage services)	Supply of ‘hotel accommodation’ having value of supply of a unit of accommodation above one thousand rupees but less than or equal to seven thousand five hundred rupees per unit per day or equivalent.	6%	-

Thus, with effect from 18^th July, 2022,  the services by way of supply of hotel accommodation having value of supply of a unit of accommodation less than or equal to seven thousand five hundred rupees per unit per day or equivalent shall be taxable @ 12% under GST.

Now, we shall analyze the implication on the taxability of such services after withdrawal of exemption on the above services.

Important Definitions

Hotel Accommodation

As per Explanation to Notification no 12/2017 - CGST (Rate) dated 28-06-2017 as amended from time to time, Hotel accommodation is defined as follows;

(xxxiv) ‘Hotel accommodation’ means supply, by way of accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes including the supply of time share usage rights by way of accommodation.

Other Definitions

As per Explanation to Notification no 12/2017 – CGST (Rate) dated 28-06-2017 as amended from time to time,

(xxxv) ‘Declared tariff’ means charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.

(xxxvi) ‘Specified premises’ means premises providing ‘hotel accommodation’ services having declared tariff of any unit of accommodation above seven thousand five hundred rupees per unit per day.

Impact of the Amendment on Hotel Accommodation Services

Nature of Hotel Accommodation	Taxability before change	Taxability after change
Having value of supply of a unit upto INR 1,000 per unit per day or equivalent.	Completely Exempt	Taxable @ 12% in hands of the Service Provider
Having value of supply of a unit more than INR 1000 but  less than INR 7,500 per unit per day or equivalent.	Taxable @ 12% in hands of the Service Provider	Taxable @ 12% in hands of the Service Provider
Having value of supply of a unit equal to or more than INR 7,500 per unit per day or equivalent.	Taxable @ 18% in hands of the Service Provider	Taxable @ 18% in hands of the Service Provider

Issues & Challenges

1. Small Players like Homestays, Guest houses, Small Hotels under GST Net

The Hotel Industry has in India is largely fragmented with a major share of unorganized hotel industry. As per the Industry reports, the operating margin for budget and mid-category hotels is between 18-25% in India, which can be even lower considering heavy discounting by online hotel aggregators. Earlier, the small players in this industry where the value of supply is upto INR 1000/unit/day were exempt from levying GST.  However, the recent move of withdrawing the exemption will make these services expensive for the customers especially in case of B2C segments. The majority of inputs sourced by them also belong to unorganized sector thus, it needs to be seen how much benefit of claim of ITC will be utilized by them. Additionally, the cost of compliance will also add to their cost.

2. Fate of Hostel Accommodation/ Paying Guests accommodations given by Coaching Institutes/ Private Organizations or Individuals

Hostel accommodation cannot be considered the Residential dwelling vide ruling in the case of IN RE: M/S. GHODAWAT EDUSERVE LLP [2021 (8) TMI 1230 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA]

Thus, by virtue of the above, Hostel accommodation provided by Coaching institutes/ Private Organizations or Individuals where value of supply is upto INR 1000/unit/ day were out of GST till date will now be taxable under GST.

3. Hostel Accommodation provided by Educational Institutions

The services provided by Educational institutions to its students, faculty & Staff are exempted vide entry no. 66 of Exemption Notification No. 12/2017-Central Tax (Rate)/ S. No. 69 of Exemption Notification No. 9/2017- Integrated Tax (Rate) as amended.

As per clause 2(y) of Notification No. 12/2017-Central Tax (rate) “educational institution” means an institution providing services by way of, -

(i)    pre-school education and education up to higher secondary school or equivalent;

(ii)   education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

(iii)   education as a part of an approved vocational education course.

Thus, in case the entity falls within the definition of Educational Institution, then Hostel accommodation provided to its students will qualify as services by Educational Institution and the aforesaid exemption may apply on such service.

However, in case Hostel accommodation is provided to any person other than student, faculty & Staff or student pertaining to the  course which is not recognized by any law or not the part of an approved vocational education course will be part of taxable services even if the consideration charged is upto INR 1000 per unit per day.

4. Accommodation provided by religious institutions in Dharamshalas

As per S. No. 13(b) of Exemption Notification No. 12/2017-Central Tax (Rate)/ S. No. 14 of Exemption Notification No. 9/2017-Integrated Tax (Rate) as amended

renting of precincts of a religious place meant for general public, owned or managed by an entity registered as a charitable or religious trust under section 12AA or 12AB [the words ‘or 12AB’ has been inserted vide Notification No. 07/2021-Central Tax (Rate) dated 30-09-2021 w.e.f. 01-10-2021] of the Income tax Act, 1961 (hereinafter referred to as the Income-tax Act), or a trust or an institution registered under sub clause (v) of clause (23C) of section 10 of the Income-tax Act or a body or an authority covered under clause (23BBA) of section 10 of the Income-tax Act:

Provided that nothing contained in (b) of this exemption shall apply to, -

1. renting of rooms where charges are one thousand rupees or more per day;

Thus, in case of renting of religious precincts including Dharmashalas  or any other religious place meant for general public, owned or managed by an entity registered as a charitable or religious trust under Section 12AA or 12AB will still remain exempt in case rentals of the rooms are upto INR 1000.

5. Yoga & Meditation Camps organised by Charitable Trusts

Services provided by entity registered under Section 12AA or 12AB of the Income-tax Act, 1961 by way of advancement of religion, spirituality or yoga are exempt vide S. No. 1 of Exemption Notification No. 12/2017-Central Tax (Rate)/ Notification No. 09/2017 - Integrated Tax (Rate). Residential programmes or camps where the fee charged includes cost of lodging and boarding shall also be exempt as long as the primary and predominant activity, objective and purpose of such residential programmes or camps is advancement of religion, spirituality or yoga. However, if charitable or religious trusts merely or primarily provide accommodation or serve food and drinks against consideration in any form including donation, such activities will be taxable.

Further, this has also been clarified by CBIC vide Circular No. 32/06/2018-GST dated 12th February 2018 as follows;

Hostel accommodation services do not fall within the ambit of charitable activities as defined in para 2(r) of notification No. 12/2017-CT (Rate). However, services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent are exempt. Thus, accommodation service in hostels including by Trusts having declared tariff below one thousand rupees per day is exempt. [SI. No. 14 of notification No. 12/2017-CT(Rate) refers]