Cheating the Citizen: The High Cost of the Taxman’s Duplicity for the hotel industry
The trust between a government and its citizens is a sacred covenant. When the government expects the taxpayer to act with honesty and integrity, the taxman must first display that same honesty and integrity and set a compelling example. Anything less than complete, upfront disclosure is an unacceptable conduct that leaves a very bad taste in the mouth and is, quite simply, avoidable.
It is increasingly seen that tax authorities incorporate dubious, complex means to make a fool out of the average citizen. The classic example of this convoluted and opaque taxation is the Goods and Services Tax (GST) rate on food and beverages (F&B) in hotel restaurants.
The Dubious Provision of the Law: GST on Hotel Restaurants
The government’s intent, as codified in the law, appears straightforward, but its mechanism is anything but. The flaw lies in how the applicable GST rate for a restaurant service is determined, not by the quality of the food or the price of the meal, but by the price of a room in the same hotel.
The Law’s Specific Provision (Notification No. 20/2019-Central Tax (Rate), dated September 30, 2019, as amended):
| Service | Applicable GST Rate | Conditions/Notes |
| Restaurant Service (General/Standalone) | 5% (Without Input Tax Credit – ITC) | This applies to most restaurants and eateries. The restaurant cannot claim a credit for taxes paid on its inputs (raw materials, services, etc.). |
| Restaurant Service in a “Specified Premises” | 18% (With Input Tax Credit – ITC) | The core of the controversy. This rate is mandatory for any restaurant located within a hotel defined as a “Specified Premises.” |
The Core Flaw: The Definition of “Specified Premises”
The GST rate on your dal makhani shouldn’t depend on the cost of a suite on the top floor, yet that is the essence of the rule!
A “Specified Premises” is defined as a hotel or resort where the value of supply of any unit of accommodation (room) exceeds ₹7,500 per unit per day during the preceding financial year.
This is the very provision that lays bare the arbitrary and opaque nature of the imposition.
The Taxman’s Duplicity: How the Common Citizen is Duped
The government has successfully blurred the line between a luxury service (a high-end hotel room) and an everyday necessity/leisure activity (eating a meal) to impose a significantly higher tax rate on a general consumer.
1. Imposing a “Luxury” Tax on Non-Luxury Customers:
A citizen who walks into a hotel coffee shop for a ₹500 cup of coffee may be forced to pay 18% GST ($₹90), simply because the hotel has a few luxury rooms that rent for over ₹7,500.
The same citizen could walk across the street to a standalone coffee shop of the same quality and pay only 5% GST ($₹25) on the same coffee.
The common person who never uses the high-tariff room is penalized simply by dining in the hotel’s physical vicinity. This is an unjust and arbitrary burden.
The Hidden Tax Hike for Walk-in Diners:
The 18% rate is justified for the hotel because it allows them to claim Input Tax Credit (ITC)—meaning the hotel can reduce its final tax liability by claiming credit for the GST paid on their purchases (furniture, crockery, raw materials, etc.).
This ITC benefit accrues to the hotel, not the customer! For a walk-in consumer, the effective price difference is a simple, massive jump from 5% to 18%. The assumption that the hotel will fully pass on the ITC benefit to the walk-in customer is a complete fallacy.
Lack of Transparent Disclosure:
The most egregious failure is the lack of upfront communication. The taxman should not have to chase down a difference of 13% years later.
Hotels should be legally mandated to highlight this rule in a prominent manner on their menus, leaflets, and literature. For example: “Notice: As this premises offered accommodation above ₹7,500 last financial year, all restaurant bills are mandated to attract 18% GST.
The Taxman’s Foul Game: Incentivizing Higher Tax
The tax administration resorts to such dubious means, not only by imposing an unfair burden but also by deliberately creating a system that encourages a higher tax rate.
The 5% GST rate is without ITC to the hotel, whereas the 18% GST rate is with Input Tax Credit. Therefore, the taxman has played a foul game once again by incentivizing the hotel to avail the GST on inputs and consequently charge the higher 18% rate to the consumer. This is an unacceptable conduct because breaking the chain of credit (by denying ITC at 5%) is antithetical to the basic principle of the Goods and Services Tax system.
A Larger Pattern of Misleading Practices:
It is increasingly seen that the tax administration resorts to such dubious means to make a fool out of every citizen — not just in GST but also in Income Tax, where the narrative of “income up to ₹12,00,000 exempt” is similarly misleading in its presentation.
The taxman should understand that such tactics leave a very bad taste in the mouth. They erode public trust and are entirely avoidable.
The Moot Question
If the government itself is not transparent and honest in its tax policy design and implementation—linking the tax on an individual’s plate to an unrelated room tariff—then how can the government expect genuine honesty and complete compliance from the taxpayers?
Cheating is an unacceptable conduct. The government and the taxman must display the highest degree of honesty and integrity and ensure complete upfront disclosures to the consumer. The taxman should understand that all this leaves a very bad taste in the mouth & is therefore entirely avoidable.
The Way Forward
If the intent of GST is to be fair, transparent, and consumption-based, the rate must depend on the actual room tariff charged to the customer, not on what the hotel might charge for another room to someone else.
The existing rule penalizes both the consumer and the honest hotelier who cannot possibly restrict all room categories below ₹7,500.
It is time the GST Council and CBIC revisit this ambiguous provision and issue a clear, consumer-friendly clarification. The law should not rely on technical traps to collect more tax. It should stand for truth in taxation — where the rate you see is the rate you actually pay, without hidden conditions buried in the fine print.
rajiv.pec@gmail.com
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