Demystifying Hotel GST: Why Did the Company Pay 18% GST on a ₹6,000 Room?

As professionals, we often encounter clients who are puzzled by their bills when checking out of luxury hotels. Let’s explore a very common scenario:

Scenario: A company booked two rooms in a 5-star hotel for their director’s Room A has a tariff of ₹10,000 per night, and Room B has a tariff of ₹6,000 per night. At checkout, it notices that the hotel has applied an 18% GST on BOTH rooms.

Wait a minute, isn’t the GST rate supposed to be 5% for rooms priced under ₹7,500? Is the hotel overcharging on the ₹6,000 room?

No, the hotel is perfectly compliant with the law! Here is the breakdown of why this happens:

1. The ₹7,500 Threshold & The ITC Catch: Under GST Tariff Heading 9963, hotel accommodation with a value of supply up to ₹7,500 per room per day attracts a 5% GST rate. Rooms priced above ₹7,500 per day attract an 18% GST rate. However, the lower 5% rate comes with a strict legal condition: it is only available provided that the hotel has not taken the credit of input tax charged on goods and services used in supplying the service.
2. The Business of 5-Star Hotels: Established 5-star hotels incur massive operational and capital expenses from central air conditioning and luxury furniture to premium linens and maintenance. To manage these substantial costs efficiently, luxury hotels generally choose to claim Input Tax Credit of the GST they pay on their purchases.
3. Falling into the “Residuary” Bracket: Because the hotel claims ITC for its overall business operations, it immediately disqualifies itself from the conditional 5% tax bracket. Under the GST Act, when an accommodation service does not meet the specific conditions of the lower tax brackets, it falls into the residuary category for accommodation services, which mandates a standard rate of 18% GST.

A hotel cannot selectively claim ITC for its luxury suites while opting for a “No-ITC” 5% rate for its standard rooms. By making the business decision to claim ITC across the board, the hotel must apply the 18% residuary rate to all its rooms, regardless of whether a specific room’s tariff falls below the ₹7,500 mark.

So, the next time you see 18% GST being charged on a room tariff of less than ₹7,500 in a luxury hotel, you will know exactly how the GST mechanics are working behind the scenes!