The Good, Bad and Confusing

Features, GST and its Implications

A month after the GST regime was unrolled, we find out how the hospitality industry is coping with one of the world’s largest and most complex tax reforms

By Vinita Bhatia

One nation, one market, one tax – that was the underlying premise and promise on which Goods and Services Tax (GST) was structured. Sections of the business world were excited about the new tax regime that promised to unify the plethora of local and national tariffs. Many were noncommittal, wondering how the assurance of a common single market would bode for their operations on ground.

Interestingly, the hospitality industry was amongst the first to welcome the imposition of GST. However, its rollout came close on the heels of a liquor ban on state and national highways, and the beef ban, both of which hit their revenues badly. There was some talk about portion-control as well, but that passed without witnessing much action. Hence, faced with a tax overhaul, it was not surprising that the industry seemed wary about its likely consequences on their business, since several of them had seen some degree of de-growth post the liquor ban.
A month after GST was announced, we find out from various sections of the hospitality industry whether the hype around the most important tax reform to date has lived up to the expectations. And the reactions indicate that while it is likely to benefit the industry and the nation, GST still needs a lot of work.

A common feedback that hoteliers and restaurateurs have shared about GST is that it has made the current complex taxation policy transparent and inclusive. It helped that the government had announced about the rollout well in advance, so the trade fraternity could prepare for it. Senior members of the GST Council and other government agencies met with trade associations across the country to acquaint them with its workings and its effect on their business.

Many companies had planned in advance to ensure a smooth changeover, like Mahindra Holidays. “The invoicing was carried out with new tax rates in a phased manner across all of our resorts,” said Vasant Krishnan, CFO of Mahindra Holidays.
GST did not spring any surprises on Carlson Rezidor Hotel Group either, as the company had been preparing months before the cut-off date. Its South Asia CEO, Raj Rana said that since the two important aspects of GST implementation are technology and training dependency, it could ensure a seamless transition on both fronts.

Anticipating an increase in taxes due to GST, Berggruen Hotels started negotiating contracts only with GST-registered vendors. Its executive director and CFO, Vikas Chadha, said, “We ensured that all contracts had clauses mentioning that the tax increase due to GST would be chargeable. The challenge of educating customers and issues in implementation, especially on procurements, would remain for the initial months as it is natural that customers will take time to understand the different tax slabs, and it effects on the billing of goods/ services availed by them.”

Ginger Hotels, too, decided to take a proactive approach and established a cross-functional team from finance, sales, procurement, operations and technology to execute a smooth roll out. “Our partners were informed to share invoices on or before 30th June. Our PMS system was GST-compliant effective 1st July 2017. Incidentally, there was zero cost incurred in the implementation and system upgrade,” noted Rahul Pandit, MD and CEO of Ginger Hotels.

Despite meticulously planning for GST, many companies still faced challenges when transitioning to the new tax regime. AccorHotels India, which had commenced its GST implementation journey from February 2017 and had planned the switch to the tiniest detail, had to roll out a backup IT plan for a few days during the initial stage, as its software vendors were not ready with their GST solutions on time. The operations team, too, faced some teething issues but with careful preparation, the overall implementation did not see any major disruptions.

Choice Hotels, too, faced a similar problem where software companies were not geared up to the changes as the guidelines were changing daily. “Another challenge we faced was the ambiguity on the taxable amount – it was unclear whether the different slabs would be on charged or published tariff,” said Vilas Pawar, CEO, Choice Hotels. This is an issue that many other hoteliers have also raised and something that government officials, too, have acknowledged.

Dilip Datwani, president of Hotel Restaurants Western Association India (HRWAI) pointed out that 28% rate for rooms with tariff of INR 7500, amongst the highest in the world, will seriously affect cash flow. “Our association has appealed to the government to remove this condition and determine the tax percentage based on the actual transaction value and to review the ITC clause for interstate accommodations (see box).”

Talking about this need for clarifications, Sungita Sharma, principal additional director general, Vigilance Department of Central Board of Customs & Excise agreed that uncertainty does exist in the industry about declared and published tariff. She said, “There is a lot of confusion about what is published tariff, where should it be published – whether it should be put on the website, displayed in the room, given to the customer, etc. When I checked with our internal teams, I was told some of these processes was already included in the Service Tax and some of it was taken from the state of Gujarat procedure where hoteliers gave published tariff to state authorities on a quarterly basis.” She added that she had nonetheless flagged this issue internally and clarity about the nomenclature (declared/published) will soon be furnished, which ought to ease matters.
Taking the conversation about perplexity ahead, the other big topic why the industry did not go all out to pop the champagne after GST was the 28% tax levied on 5-star hotels with room tariff of INR 7,500 and above. Talking about this Sharma stated, “The overriding feedback that I have received from my discussions with the industry is that this is a terribly heavy tax that the government has imposed on us. When we did some number crunching, it turned out that the impact earlier would have been 19% to 20%, now it has been fixed at 28%. Unfortunately, the Chief Ministers have not agreed to lower rates for 5-star hotels. It is presumed that the luxury tax that was at 30% in most states, except two, has been lowered to 28%.”

Chadha stated that the industry is awaiting clarity on status of the luxury tax exemption for certain properties. “We are presenting to the Tourism Ministry authorities for hotels that earlier had exemptions for 10 years on the basis of Luxury tax. The new GST has not clarified the process of subsidy on this tax, which needs to be taken up by the government urgently and guidelines issued, as this measure was a great encouragement to hotel operators to build infrastructure and new hotels to promote tourism.”

While lauding the simplification of the tax structure and the improvement of transparency under GST, Rana believed that the upper bracket of 28% is high in comparison to neighbouring countries. “It puts India in a competitively disadvantageous position as we compete for destination driven business particularly MICE. Room rates are dynamic and vary with supply and demand, while GST rates are based on published room rates. Further, a hotel’s room inventory is not of a standard type, but usually a mix involving higher category rooms such as suites. Add to this the seasonality of business and overall administration of GST implementation is creating more unique challenges. Therefore, perhaps a blended rate, such as that implemented for restaurants (18%), would have been a better option,” he suggested.


The writing is on the wall, and has been there for a while now – GST is slated to make India Inc. efficient. But this is unlikely to happen overnight. Like Jean-Michel Cassé, COO-India & South Asia, AccorHotels noted, “It has very clear guidelines on how each industry needs to manage their accounts and file returns but it will require businesses to become technologically adept, increasing the technological burden and cost for compliance. We feel that an elaborate tax structure for hospitality sector coupled with multiple contentious and silent provisions in law will pose a major challenge in the long run.”

Of course, in the pre-GST era returns were filed every six months i.e. for the period of April to September and October to March; while under the GST regime, three returns needs to be filed every month for each GST registration, which increases the compliance and technology cost significantly for smaller brands. Pandit also pointed out that the industry has sought clarity from the government with respect to the applicability of GST on the applied vs. the declared tariff and on composite services (for e.g. extra bed, late checkout, etc.).

While GST has been imposed by the powers-that-be with good economic sense, the hospitality fraternity has questioning the reasons for excluding alcohol and electricity from its purview. Krishnan explained, “The taxation on alcohol would be different than the single GST rate. The hotel industry consumes a lot of electricity as a prime consumable and the levy of electricity duty would also not be covered in GST. Thus, the hotel industry would not be able to avail the input tax credit (ITC) on these two items which will have a negative impact on this sector.”

In light of this situation, Zorawar Kalra of Massive Restaurants observed that the hospitality segment now has to operate with two different bills – food has a separate set of taxes than liquor. “One way to resolve these challenges is that the government could set up information centres and have workshops at various restaurants. Everyone will be equipped with the correct information about GST, as it will ease ambiguity. Restaurant bodies should work with governmental agencies to get better clarity about the GST structure and including liquor under the ambit of the GST as it will reduce confusion,” he said.
Adarsh Shetty, president of Indian Hotel and Restaurant Association (AHAR) felt that the restaurant segment was given a raw deal on the basis of classification under non-A/C and A/C and liquor serving establishments and charged under slabs of 12% and 18%. “Standalone hotels that have an A/C section have to pay 18%. Customers who sit in the non/AC area or order for takeaway complain about paying 18% instead of 12%, which is the GST for a non-AC restaurant,” he said. However, he hoped that the operational issues will be known only after the first return filing in August 2017 and these issues can be ironed out with the support from the Government.

The initial hiccups and apprehensions aside, it is apparent that GST will disrupt business – and in a good way too. According to Krishnan the biggest benefit is the administrative ease it heralds since it has abolished several other taxes that were levied earlier, like service tax, VAT, etc, which have now been subsumed into GST. This will help the industry not only from a tax streamlining perspective, but would also help them avail ITC holistically.

“The hospitality industry will find it easier to claim and avail ITC and will get full ITC on their inputs. Before GST, the tax paid on inputs (raw edibles for food, cleaning supplies, etc.) could not be adjusted against the output in all cases. However, this will become easier now,” Krishnan added.

Besides reaping the benefits of standardised and uniform tax rates and better utilisation of ITC, Vimal Singh, MD, South Asia, Louvre Hotels Group believed that GST implementation and the excise taxes being withdrawn will attract more investment from global brands in the Indian hospitality market. “As a group, hotels that we were looking at three months earlier are 15% cheaper. Due to GST implementation, the cost is going to get down making it more profitable for investors, developers and owners in the hospitality industry,” he conjectured.

According to Kalra, the short-term benefits of GST for consumers are immediate, as reduction in taxes has made dining out cheaper by under 1%. “The long term benefits are going to be significant as it will bring simplicity and clarity to the tax structure, as diners will be able to know the exact amount of tax paid by them for a particular meal. However, I wish that liquor was also a part of GST and hope that it is soon covered under it.”

Adarsh Shetty pointed out that adhering to right book-keeping practices has other ramifications. “In the long term, GST will lead to a more accurate accounting practice amongst restaurateurs, which in turn will facilitate in getting finance from bans for business development activities,” he said. His sentiments are echoed by Nityanand Shetty, owner, Thyme Bistro who pointed out that the only fear that lurks in everyone restaurateur’s mind is the operational challenges it poses. “GST will bring in tax discipline in all organisations. Several restaurant owners who probably didn’t have a good grip on their sales/purchase will now have tighter control over it, which will check pilferages in any form,” he said.

In the long run, when it comes to GST, it is evident that the pros will outweigh the cons. The hospitality industry will be able to enjoy the benefits of centralised registration, uniformity in process and better utilisation of ITC, which makes it simpler to manage business operations. Gradually, as taxation becomes transparent, compliance costs are expected to go down. And as the final cost to end user decreases, the industry at large can also expect to become more appealing for overseas travellers, which will give the entire business a fillip. And more business is always welcome, some initial glitches notwithstanding, isn’t it?

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