Hotels across India get GST notices for underpayment on restaurant services

Hotels face GST demands as authorities flag underpayment on restaurant services linked to room tariffs above ₹7,500

Scores of hotels across the country have received retrospective demand notices worth thousands of crores of rupees for underpayment of the goods and services tax (GST) for restaurant services as authorities cracked down on the alleged evasion, even as hotel associations cried foul saying that these notices emanated from lack of clarity in GST rules and that there was no GST evasion.

 

Under the law, if the declared tariff of a hotel room is more than ₹7,500 per day, GST at 18 per cent becomes applicable on restaurant services also. However, for hotels with room rents below ₹7500, the GST on restaurant services is 5 per cent.

 

‘Specified premises’

 

Hotels with room tariffs exceeding ₹7,500 per day are categorised as “specified premises”.  For restaurants outside the premises, the applicable GST rate is 5 per cent only.

 

GST authorities said that many establishments continued to pay GST at the concessional rate of 5 per cent instead of 18 per cent on restaurant services even though the hotel room tariffs went above the ₹7,500 threshold.

 

In one such case, according to sources, the Pune unit of the Directorate General of GST Intelligence (DGGI) issued a notice to a hospitality company for underpaying ₹3.63 crore on restaurant services between the financial year 2020 (FY20) and FY25.

 

Another hotel group was found to have underpaid ₹44.9 lakh on restaurant supplies during October 2021-July 2023. Both demands were raised under Section 74 of the CGST Act, with interest and penalty also applicable, according to the documents seen by Business Standard.

 

Industry experts argue that linking restaurant tax rates to room tariffs is both unfair and impractical.

 

“This provision will necessarily have to be tested on the touchstone of Constitutionality, particularly using the principles of proportionality. The GST Council’s clear intent has always been to rationalise and reduce tax on restaurant services. Linking the rate of tax on restaurants to the room tariff of hotels leads to disproportionate and absurd results,” said Abhishek A Rastogi, founder, Rastogi Chambers, who claims to represent several industry players on the issue.

 

K Syama Raju, President of the Federation of Hotel & Restaurant Associations of India (FHRAI) told Business Standard, that the notices had created financial distress for companies in the sector.

 

“This is not a case of tax evasion but the result of long-standing ambiguities in GST rules and unawareness, which left many hotels, especially small and mid-scale ones, vulnerable to unintentional non-compliance. In many cases, even if a hotel charged more than ₹7,500 on any single occasion, demand notices for 18 per cent GST were raised retrospectively from the time GST was implemented. This is clearly impractical and stems from regulatory ambiguity rather than deliberate non-compliance,” he said.

 

The industry body head highlighted that since the past many years, the hospitality industry has faced challenges due to the linking of food and beverage rates with room charges and the ambiguity in GST provisions that fluctuated between “Value of Services Received” and “Declared Tariff.”

 

“These confusions have led to demand notices being issued to hotels across the country. Invoicing through Online Travel Aggregators (OTAs) has further complicated compliance, as fluctuating room tariffs make it difficult to determine the correct GST rate,” he added.

 

The 55th GST Council meeting introduced an amendment that allowed hotels to opt in or opt out of the “specified premises” category if their room tariffs crossed ₹7,500 per night. “While this amendment has prospectively solved the problem and provided clarity for the future, past demand notices continue to trouble the industry. Since no tax evasion occurred, it is both fair and necessary for the government to regularise past GST dues on an ‘as-is basis’ which has precedence,” Shyama Raju said.

 

Walk-in diners

 

Hotel operators also raised concerns over the impact on walk-in diners.

 

“The current tax framework creates undue hardship for customers who simply walk into our restaurants without availing hotel rooms. Linking restaurant tax rates to room tariffs is impractical, as it penalises diners who are not even staying with us. Restaurant services should be treated independently to ensure fairness and ease of doing business,” said Laxman Kariya, managing director, St Laurn Hotels and Resorts.

 

An email sent to the Finance Ministry seeking comments on the issue remained unanswered till the time of going to press.  

 

(With inputs from Gulveen Aulakh)