GST on Hospitality Industry: Hotel Accommodation, Restaurant GST Rates, ITC & Rule 42 Reversal

Introduction

GST on hospitality industry involves multiple tax rates, conditional input tax credit (ITC) restrictions, and complex classification issues relating to hotel accommodation, restaurant services, banquet services, transportation, and ancillary facilities such as spa and laundry. The GST rate on hotel accommodation depends upon the value of supply per unit per day, while restaurant GST rates depend upon whether the hotel qualifies as a “specified premises”. Further, hotels frequently face practical challenges relating to Rule 42 ITC reversal, banquet taxation, composite supplies, service charge, and reconciliation between books and GST returns. This article provides a detailed and updated analysis of GST on hotels and hospitality industry services along with latest GST rates, ITC eligibility, SAC classification, and practical industry issues.

Key Takeaways

• GST on hotel accommodation up to ₹7,500 is taxable at 5% without ITC
• Hotel accommodation above ₹7,500 is taxable at 18% with ITC
• Restaurant services at specified premises attract 18% GST with ITC
• Restaurant services at other than specified premises attract 5% GST without ITC
• Banquet hall and outdoor catering services in specified premises are taxable at 18%
• Rule 42 and Rule 43 reversal applies in case of common credits used for taxable and non-creditable supplies
• Hotel bookings through MakeMyTrip, Agoda and similar ECOs are subject to TCS provisions under GST

 Legal Framework

GST on hospitality services is primarily governed by Notification No. 11/2017–Central Tax (Rate) dated 28 June 2017, which prescribes the rate of tax on services under various Service Accounting Codes (SAC). This notification has been amended multiple times, including significant changes through Notification No. 20/2019–Central Tax (Rate) and Notification No. 03/2022–Central Tax (Rate), Notification No. 15/2025 – Central Tax (Rate), which altered the structure of taxation for accommodation and restaurant services. Accordingly, any analysis must be read in conjunction with these amendments as applicable from time to time.

GST Rate on Hotel Accommodation Services

Accommodation services provided by hotels, inns, guest houses, clubs and the like meant for residential, or lodging purposes fall under SAC 996311. As per Entry No. 7 of Notification No. 11/2017–Central Tax (Rate) (as amended), GST is levied based on the value of supply of the unit of accommodation.

At present, accommodation services are effectively taxed at 5% without input tax credit where the value of supply of a unit of accommodation per day does not exceed ₹7,500. Where the value exceeds ₹7,500 per unit per day, GST is applicable at 18% with full ITC eligibility. The shift from “declared tariff” to “value of supply” as the determining factor, brought in through amendments, has significant practical implications, as the actual transaction value now governs the rate instead of the published tariff.

The concessional 5% rate is subject to a strict condition that no ITC shall be availed on goods and services used in supplying the service. This condition often results in cost accumulation for hotel operators and must be carefully evaluated while pricing services.

GST Rate on Restaurant Services

Before analysing the GST rate applicability on restaurant services, it is important to understand the definition of specified premises.

Meaning of Specified Premises:

“Specified premises”, for a financial year, means,-

• a premises from where the supplier has provided in the preceding financial year, ‘hotel accommodation’ service having the value of supply of any unit of accommodation above seven thousand five hundred rupees per unit per day or equivalent; or
• a premises for which a registered person supplying ‘hotel accommodation’ service has filed a declaration, on or after the 1st of January and not later than 31st of March of the preceding financial year, declaring the said premises to be a specified premises; or
• a premises for which a person applying for registration has filed a declaration, within fifteen days of obtaining acknowledgement for the registration application, declaring the said premises to be a specified premises;

 Restaurant services provided at specified premises —where accommodation exceeds the prescribed limit—are taxed at 18% with ITC. This distinction creates a dual structure requiring careful classification based on the nature of the establishment and associated accommodation services.

The denial of ITC in the 5% category has been a major concern for the industry, as it increases the embedded tax cost in operations.

GST on Transportation and Airport Pickup Services Provided by Hotels

Hotels usually provide transportation facilities such as airport pick-up and drop services. Where such services are naturally bundled with accommodation and form part of a composite supply, the tax treatment follows that of the principal supply, i.e., accommodation.

However, where transportation is charged separately, it must be classified independently. Passenger transport services have their own rate structure, typically 5% without ITC or 18% with ITC.

**It is further provided that where the supplier of input service in the same line of business charges central tax at a rate higher than 2.5%, credit of input tax charged on the input service in the same line of business in excess of the tax paid or payable at the rate of 2.5%, shall not be taken.

Accordingly, GST rate on transportation services provided by hotels is chargeable at 18% with ITC or 5% with restriction on ITC.

GST on Banquet Hall, Outdoor Catering and Event Services by Hotels

Hotels provide banquet hall and catering services for events and functions. The GST rate applicability is as follows.

Accordingly outdoor catering services provided by hotels characterized as specified premises are chargeable at 18% and ITC is eligible to claim. Further for hotels not characterized as specified premises services are chargeable at 5% without ITC.

It is further provided that if there is composite supply of ‘outdoor catering’ together with renting of premises (including hotel, convention centre, club, pandal, shamiana or any other place, specially arranged for organising a function) provided by hotels characterized as specified premises such services are chargeable at 18%.

GST on Spa, Laundry Services and other ancillary services provided by hotel

Hotels typically provide a range of ancillary services such as laundry, spa, wellness treatments, gymnasium access, and other recreational facilities.

The above taxability and Input tax credit eligibility is summarized as follows:

Latest GST Rates on Hotels and Hospitality Services (Updated 2026)

Reversal of ITC under rule 42/43 of CGST rules 2017

Now let us understand the manner of reversal of input tax credit under Rule 42 and Rule 43 of the CGST Rules, 2017 in Form GSTR-3B.

It is to be noted that along with the above-mentioned services at prescribed rates where ITC is not eligible the supply of liquor which is outside the purview of GST will be considered for ITC reversal under rule 42/43 of CGST rules 2017. Further there are self-consumption or non-chargeable supply of restaurant and accommodation (supply free of cost) which need to be considered for ITC reversal.

It is pertinent to note that bifurcation of Input tax credit availed for different services provided and different rates is practically difficult hence the industry generally treats a substantial portion of input tax credit as common credit for reversal under rule 42/43.

Let’s understand the calculation of ITC reversal with the following example:

* Rule 43 would separately apply in case of common capital goods used for taxable and exempt/non-creditable supplies.

Frequently Asked Questions (FAQs) and Practical Issues in Hospitality GST

Practical issues/challenges in Hospitality Industry: –

 1. What is the GST Rate on Hotel Room Packages Including Breakfast? (room + breakfast composite supply)?

 Where a hotel provides a package including room stay along with breakfast, the transaction is generally treated as a composite supply, where the principal supply is accommodation. Accordingly, the entire package is taxed at the GST rate applicable to accommodation services. provided the breakfast component is naturally bundled and not separately charged.

Therefore, if the value of supply per unit per day is up to ₹7,500, GST is applicable at 5% without ITC, and if it exceeds ₹7,500, GST is applicable at 18% with ITC, provided the breakfast is naturally bundled and not charged separately.

2. Can Restaurant GST Rate in Hotels Change Based on Room Tariff?

 The GST rate on restaurant services is not determined based on the room rate of an individual guest. Instead, it depends on whether the hotel qualifies as a “specified premises”

In simple terms, the classification is hotel-level, not customer-level. If a hotel is considered a specified premises (based on the prescribed threshold for specified premises), then restaurant services for all customers in that hotel will be taxed at 18% with ITC. If the hotel is not a specified premises, then restaurant services for all customers will be taxed at 5% without ITC.

3. What is the GST rate on soft drinks (aerated beverages) served in a restaurant?

 Soft drinks or aerated beverages supplied as part of restaurant services are not taxed separately at higher product rates; instead, they follow the restaurant service rate as a composite supply. Accordingly, if the supply qualifies as restaurant service under Notification No. 11/2017-Central Tax (Rate) read with Notification No. 20/2019–Central Tax (Rate), GST is applicable at 5% without ITC (in non-specified premises) or 18% with ITC (in specified premises). The higher GST rate applicable to aerated drinks when sold independently (along with compensation cess) does not apply when such beverages are supplied as part of restaurant services.

4. How to reconcile revenue as per books of accounts with supply reported in GST returns?

It is pertinent to note that the revenue which is recorded in the books is based on accrual which means if guest checks into a hotel on 27^th May and stays in hotel till 4^th of June and the room tariff is INR 8,000 per day. Then as per accounting standards the revenue of 27^th May to 31^st May is recorded in books on accrual basis. This is called as unbilled revenue. However, the reporting in GST return happens when invoice is raised which will be raised at the time of checkout itself. Hence there will always be a gap of unbilled revenue between the books and GST return.

Further, advances received towards banquet bookings are also liable to GST at the time of receipt. However, the same is not recognised as revenue in the books and will be parked in balance sheet as advances. Hence, advances need to be considered for revenue reconciliation.

There is service charge collected by the hotels on the bill amount which is distributed to employees at the end of the month. Hence, it is not recognized as revenue in the books. However, service charge collected by hotels is generally subjected to GST by the industry considering the same as part of consideration for supply and therefore the same needs to be considered for revenue reconciliation

Let’s understand it by following example:

5. How Does TCS under GST Apply to Hotel Bookings Through MakeMyTrip, Agoda and Other ECOs?

Hotel bookings made through e-commerce operators such as MakeMyTrip, Booking.com, Agoda, Goibibo and similar platforms are subject to TCS provisions under section 52 of the CGST Act. TCS is collected by ECOs on taxable value of invoice. Hence, ECOs collect 1% (0.5% CGST and 0.5% SGST) TCS and file it through GSTR 8 which reflects under TCS credit to hotels in their GSTIN which gets reflected in the electronic cash ledger upon filing and acceptance of GSTR-8. Taxpayers need to properly reconcile it with the sales register to ensure that the sales are accurately reported in GST returns for which TCS is being claimed.

6. What is GST rate on hotel accommodation services from inception of GST till now?

Following table provides GST rates and ITC eligibility form the various periods.

GST Rate History on Hotel Accommodation:

 7.Why do hotels charge only CGST and SGST even when the guest is a registered person having GSTIN of another State?

Under GST law, accommodation services provided by a hotel are treated as services directly connected with an immovable property. As per Section 12(3) of the IGST Act, 2017, the place of supply for hotel accommodation is the location of the hotel itself.

For example, if a hotel located in Maharashtra provides accommodation to a company registered in Delhi, the place of supply will still be Maharashtra because the hotel property is situated in Maharashtra. Since both the location of supplier and place of supply are in the same State, the transaction qualifies as an intra-State supply, and therefore the hotel charges CGST and SGST instead of IGST.

 8.What is GST rate applicable if room rate per day/night is INR 7000 and Guest takes extra bed for INR 1,500?

It is pertinent to note that the wording used in provision is ‘value of supply of a unit of accommodation’ hence the total amount of room tariff along with extra bed charges will be considered for checking the limit and hence 18% GST rate would apply on the same.

Further same principle would apply to early check in or late check out charges if collected from guest provided it does not amount to additional day/night.

Conclusion

The hospitality industry operates within one of the most complex GST frameworks due to the coexistence of multiple service classifications, concessional tax rates with ITC restrictions, composite supply principles, and frequent regulatory amendments. Proper determination of applicable GST rates, identification of specified premises, treatment of ancillary services, and accurate computation of ITC reversals under Rule 42 and Rule 43 are essential to ensure compliance and avoid litigation exposure. Considering the high volume of transactions and operational diversity in the sector, robust tax mapping, periodic reconciliations, and proper documentation become critical for hotels and hospitality businesses to effectively manage GST risks and optimize tax positions.

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Disclaimer: The views expressed are based on relevant provisions and notifications applicable as on date and are intended for educational purposes only.

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