18% GST instead of 5% to be charged on dining in a hotel if room rent per night is above this

18% GST instead of 5% to be charged on dining in a hotel if room rent per night is above this; know how much more it will cost?

If you are planning to dine out, get ready to pay more. From April 1, 2025, all hotels that fall under the definition of ‘specified premises’ will charge an 18% GST (goods and services tax) from customers dining in their hotel’s restaurants. And hotels that do not meet the criteria for ‘specified premises’ can choose either to charge an 18% GST or continue with the 5% GST on restaurant bills for customers, according to a recent government circular. If the hotel opts for an 18% GST, consumers will need to pay a higher amount. However, hotels can mitigate the additional costs for customers by engaging in careful planning and consideration.

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Read below to know more about the consumers who will be impacted by this new definition and how hoteliers can minimise this impact.

What is the new definition of specified premises?

According to a circular dated March 27, 2025, here’s what the government said: With effect from April 1, 2025, “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 the 31st of March of the preceding financial year, declaring the said premises to be 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 specified premises

“As per the above definition, a premises from which ‘hotel accommodation’ services, having the value of supply of any unit of accommodation more than Rs. 7,500 per unit per day or equivalent, have been supplied in a financial year, becomes a ‘specified premises’ for the subsequent financial year,” said the Central Board of Indirect Taxes and Customs (CBIC).

What does this mean?

Experts say that now the government has simplified the GST structure and also cleared the previous confusion. Now the GST structure for the hotel’s restaurant is divided into two parts- room rent above Rs 7500 and room rent less than Rs 7500.

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Brijesh Gandhi, Partner, GST Advisory, NPV & Associates LLP, says this classification means that:

The Restaurant services supplied at “specified premises” would be charged rate of 18% with input tax credit and
For Restaurant services supplied outside specified premises, the rate of 5% without input tax credit is applicable.

Sanjay Chhabria, Indirect Tax Lead, Nexdigm, says that under the revised GST framework hotels with room tariffs of Rs 7500 or more per day are specified premises i.e. are classified differently from other hotels. “In-house restaurants of such hotels (charging Rs 7,500 or more per room per day) will attract 18% GST with the benefit of Input Tax Credit (ITC).”

"There is no option for restaurant's inside hotels to opt for 5% GST rate with ITC since it is covered under the definition of specified premises. The said restaurants will have to compulsorily charge 18% GST rate. Only those restaurants who do not fall within the definition of specified premises have the option to charge 5% GST rate without ITC," says Shivam Mehta, Executive Partner, Lakshmikumaran and Sridharan attorneys.

Will this result in higher costs for customers?

We have asked various experts about the possible impact-higher, lower or no change due to 18% GST with tax credit input. Here’s what they said:

Price may not increase for those hotels who have higher input services

Experts say this may not result in a price increase for customers of hotels who have a higher input cost. To understand this concept, take the example of a hotel’s restaurant who is buying raw materials, others by paying 12% GST. Since the final output GST chargeable to its customers is 18%, net this hotel’s restaurant will pay 18-12= 6% GST.

“The higher GST rate does not necessarily lead to an increase in price and tax burden for the consumers. When viewed from a broader perspective, the 18% GST rate brings the added benefit of input tax credit. Previously, GST at input stage was effectively a cost for the industry, resulting in an effective cost of 23% (18% on input and 5% on output). With the recent step of introduction of input tax credit at input stage could bring down the effective cost of services for the consumers,” says Mehta from Lakshmikumaran and Sridharan attorneys.

Chartered Accountant Deep Koradia agrees with Mehta and adds, “If the respective hotel has a higher amount of ‘common ITC’ between Hotel and Restaurant, then that hotel can go for 18% GST for its restaurant and lower their final GST output liability. The emphasis is on the word ‘common ITC’, which means the common input services used by both the hotel and its restaurant. For example: soap is used both in the restaurant and hotel room. However, if a hotel has less common ITC, then it's advisable to go to a 5% GST rate for its restaurant without ITC.”

Business meetings, conferences, events in hotel’s restaurants may cost more even if a single unit of the hotel was priced above Rs 7500 in previous year

Sivakumar Ramjee, Executive Director- Indirect Tax, Nangia Andersen LLP, explains the impact on consumers:

Higher dining costs – Consumers dining in restaurants located in such hotels will be charged 18% GST instead of the usual 5%.
Increased event costs – Business meetings, conferences, or events hosted in such restaurants will become more expensive due to the higher GST.
Clarity for pricing strategy – Hotels may plan their room tariffs more carefully, knowing that even a single unit priced above Rs 7,500 in the previous year can impact the GST rate applicable to their restaurant services in the current year.

Chhabria agrees with Ramjee and adds, “The shift to an 18% GST rate (with Input Tax Credit) for restaurant services in these higher-category hotels could lead to increased costs for consumers compared to the 5% GST rate (without ITC) charged at other restaurants. For consumers, dining experiences at these hotel restaurants may become more expensive if the full 18% tax rate is passed on without any price adjustments. This represents a significant increase from the 5% rate they would encounter at standalone restaurants.”

Gandhi agrees with them both and adds: “This could potentially lead to higher costs unless the hotel adjusts its pricing to absorb the increase.”

Table showing how the impact will be felt

Scenario	Room tariff (previous financial year)	Restaurant GST rate	Input tax credit available?
Hotel A	Rs 8000	18%	Yes
Hotel B	Rs 7,400	5%	No
Hotel C	Rs 7,800 (new declare)	18%	Yes
Hotel D (Fluctuated below Rs 7,500)	Rs 7,200	5%	No

Source: Nangia Andersen LLP

Hotels need to carefully plan their operations to minimise the impact of higher GST on consumers
Ramjee says: Consumers in these hotels' restaurants will pay 18% GST instead of 5%, leading to higher dining bills.

However, hotels may adjust their pricing strategies in two ways:

Lowering room tariffs below Rs 7,500: If they ensure no room crosses this threshold in a financial year, they can avoid being classified as a ‘specified premise’.
Bundling services: Hotels may offer packages where food and room costs are combined strategically to manage GST implications.

Switching to 18% GST brings uniformity for the hotel and helps in avoiding GST notice

Koradia says: “Another reason to consider for this decision (18% GST with ITC vs 5% without ITC) is GST tax notices and GST audit. In the past, several hotel chains were served with an GST notice as it became difficult to judge which input services related to a hotel room and its restaurant. Hence now with the restaurant switching to an 18% GST regime with ITC, this aspect can be simplified.”

What might be the impact of this rule change for the industry?

ET Wealth Online has asked various experts about the possible impact of this for the hotel industry, here's what they said:

Rule changed for restautant services offered through e-commerce operators

Chartered Accountant Ashish Karundia says: It's important to note that for restaurant services provided by establishments like restaurants and eateries, other than those located at specified premises and supplied through E-commerce operators (such as Zomato, Swiggy), the E-commerce operators will be responsible for paying taxes as per section 9(5) of the CGST Act read with Notification No. 17/2017 dated June 28, 2017. However, for restaurant services provided by establishments located at specified premises and supplied through E-commerce operators, those restaurants and eateries (and not the E-commerce operators) will be liable to pay the required tax. E-commerce operators, in this case, will however be required to collect TCS at a rate of 0.50% and deposit the same with the exchequer.

Hotels get more operational clarity

Mehta says: "Shifting the tax rate from declared tariff to transaction value of the preceding FY will bring in much needed uniformity and clarity regarding the applicability of GST rate on hotel-in-house restaurants. Starting from April 1, 2025, the hotels will have to apply a uniform rate of 18% GST irrespective of the value of individual supplies, which will assist the industry in formulating its pricing strategy. The additional move of introducing of voluntary option of 18% GST rate by giving certain declarations is a positive move. It will not only allow the industry to benefit from ITC, but may ultimately bring down the costs for consumers."

Gandhi from NPV & Associates LLP says: tThe impact of this directive for hotels would be as follows:

Greater flexibility: Hotels that offer discounts on room rates below RS. 7,500 can now charge a lower GST rate on dining services.
Operational clarity: Restaurants will no longer be taxed based on arbitrary declared tariffs but rather on real transaction values.
Input Tax Credit (ITC) Benefits: Hotels falling under the 18% GST category will still be eligible for ITC, helping offset tax burdens.

Chhabria from Nexdigm explains: "Suppose a registered person has multiple hotels operating in a particular state. All hotels in that state would be covered by the same GST registration number. As we know, hotel room pricing is dynamic and depends on various factors like heavy demands, location of the property, view from the room, season etc. Due to such dynamic pricing, there was an uncertainty in the rate of GST to be charged and that too on which property i.e. whether on all hotels in same state or only one hotel which is in heavy demand. Now, the taxpayer can declare a few properties as ‘specified premises’ subjecting them to a higher rate and the balance properties may be subjected to a lower rate of GST, thereby allowing the industry much needed flexibility and clarity on rate of taxes be charged."

This new definition of specified premises essentially created a two tier restaurant taxation system

Chhabria explains:

This change essentially creates a two-tier restaurant taxation system based solely on the hotel's room rates, potentially influencing consumer dining choices and hotel revenue management strategies.
Hotels providing accommodation services would be forced to make a cost benefit analysis of their revised pricing models and the impact it would have on their demand. Other aspects that would also be looked into are as follows:
First and foremost, if it is decided to go for the 18% GST rate, it is to be decided that what proportion of ITC benefit to be passed on to the final consumer. This would directly impact the pricing. Additionally, impact of anti-profiteering provisions under GST legislation should also be analysed.
Secondly, this decision would also trigger reconfiguration in their accounting and billing systems to reflect the aforesaid decision. Other tactical decisions would include deciding on which input tax credit to avail and which not to avail.
The shift to "value of supply" means hotels must track actual transaction values rather than declared tariffs, potentially increasing record-keeping requirements which also requires a robust accounting ERP.
Transparent communication of the tax structure to the consumer.

Hotels need to evaluate their operating situation to decide whether to go for 18% GST or 5%

Ramjee says: before a hotel decides whether to adjust its pricing to stay below the Rs 7,500 threshold or accept the 'specified premises' classification, it should consider:

Room Revenue vs Restaurant Impact – If high room rates are crucial for revenue, lowering them to avoid 18% GST on dining may not be viable.
Customer Profile – Luxury/business travellers may not mind 18% GST on dining, but mid-range guests might.
Competition & Market Positioning – Competing hotels with similar services but lower GST on dining (5%) might attract price-sensitive customers.
Corporate and Event Bookings – Higher GST on dining could impact banquet and conference bookings.
Operational Strategy – Offering food-inclusive room packages or adjusting menu pricing to absorb some of the GST impact.
Tax Planning and ITC Utilisation – Hotels classified as ‘specified premises’ can claim Input Tax Credit (ITC), which may offset the higher GST.

This story originally appeared on: India Times - Author:Faqs of Insurances