Hospitality body seeks input tax credit restoration as GST costs mount on mid-market hotels

The Federation of Hotel & Restaurant Associations of India (FHRAI) used its 69th Annual General Meeting to sound the alarm on a narrow but influential corner of the Goods and Services Tax (GST) framework: the 5% tax slab for room tariffs up to ₹7,500 a night that is levied without Input Tax Credit (ITC).

FHRAI President Surendra Kumar Jaiswal warned that this structure is pushing unrecoverable taxes into operating costs, undermining affordability for domestic travellers and choking investment flows into mid-market hotels that form the backbone of India’s tourism ecosystem.

Below is a concise deep-dive that adds the GST policy background and hard industry data to frame FHRAI’s plea.

What the GST rule is — and why ITC matters?

In the post-GST architecture, the Council introduced differentiated treatment for hospitality: hotel rooms with tariffs up to ₹7,500 per unit per night are taxed at 5% without the benefit of ITC, while higher-priced rooms can fall into higher slabs but are eligible for ITC if assessed under those categories.

The practical implication: budget and mid-market hotels cannot recover the embedded GST they pay on inputs (rent, utilities, outsourced services, capex), making the 5% levy effectively a non-creditable cost. The GST Council’s explanatory material and rate sheets record this mandatory, ITC-denied 5% treatment for the sub-₹7,500 category.

Why that distinction matters: ITC lets businesses offset tax paid on purchases against the tax they collect from customers. When ITC is disallowed, GST becomes a cascading cost — increasing operating expenses and squeezing margins for hotels that typically operate on thin unit economics.

Scale of the segment affected

FHRAI says roughly 90% of Indian hotels charge room tariffs below ₹7,500 — in other words, the policy touches the large majority of India’s room inventory. The association represents over 100,000 hotels and 500,000 restaurants, and it argues that the denial of ITC disproportionately hurts properties in Tier-II and Tier-III cities, where tariffs and margins are lower and capital access is already constrained. FHRAI’s representation places the sector as central to livelihoods — directly and indirectly supporting an estimated 60 million jobs.

Independent industry metrics underscore the sector’s size and rapid recovery: Travel and Tourism’s contribution to India’s GDP has rebounded strongly post-pandemic, with international visitor spend and domestic travel both recording sharp recoveries according to the World Travel & Tourism Council (WTTC) and government reports.

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WTTC put international visitor spend at record highs in 2024 and projects strong near-term growth, while the Ministry of Tourism’s 2024–25 annual report reiterates tourism’s sizeable share of employment and GDP contribution.

The economic mechanics — how denial of ITC increases costs

Practical examples FHRAI and industry bodies cite:

Rent and utilities: Many hotels in mid-market segments lease property. GST borne on rent and utilities—now non-creditable—becomes a cost that cannot be offset.

Contracted services and outsourced labour: Housekeeping, F&B contractors and security services remit GST that hotels previously offset via ITC; denial raises unit operating costs.

Capital expenditure: Renovations, furniture and equipment attract input taxes. Without ITC, effective capital costs rise, deterring upgrades and new builds.

Higher operating costs either reduce hotel profits (disincentivising investment) or are passed to consumers as higher tariffs — an outcome that undercuts the policy’s ostensible consumer-friendly objective. FHRAI frames its demand not as a request for a tax cut but for parity and removal of cascading tax through restoration of ITC.

Market indicators and why the timing matters-- contextualising FHRAI’s urgency:

WTTC and industry trackers show domestic tourism spending has been one of the fastest recovering segments since 2023-24; domestic spend in 2024 was projected to exceed ₹16 trillion, with international visitor spend also rising. This recovery has driven occupancy improvements and new investments — but at mid-market, margin recovery is fragile and sensitive to cost shocks.

Market research and consulting projections expect the Indian hospitality market to expand substantially over the next five years, with organised accommodation and branded economy inventory growing fastest — the very cohort most exposed to the 5%/no-ITC rule.

Together, these indicators explain why a seemingly technical GST classification has outsized economic consequences: it affects the growth trajectory of the portion of the market that serves the majority of domestic travellers and which will drive occupancy and room-stock expansion in smaller cities.

FHRAI’s broader asks (and policy levers)

FHRAI’s demands at the AGM covered three policy levers:

• Restore ITC (or allow an option to charge 18% with ITC) for rooms ≤ ₹7,500 to remove the cascading cost impact. The industry argues that parity (the option to choose an ITC-enabled slab) would maintain consumer protection while enabling business continuity.


• Clarificatory circulars and compliance simplification to remove ambiguities that create compliance risk for small hotel operators. The association asked for clearer guidance from CBIC/Finance Ministry on how the rules apply to composite services and bundled supplies.


• Non-tax reforms: Recognition of hospitality as Infrastructure/Industry status to unlock low-cost credit and streamlined approvals via Single Window systems — structural steps to mobilise investment in Tier II/III areas.

What policymakers must weigh

Policymakers face a trade-off: Preserve a simplified, low-rate tax bracket intended to be consumer-facing, or restore ITC to avoid cascading costs that can stifle investment and reduce access to affordable travel.

Given the industry’s scale and employment footprint — and the growth ambitions tied to regional tourism expansion — a narrow technical change (an ITC option or clarificatory guidance) could have outsized benefits for job creation, investment, and the government’s tourism targets under Viksit Bharat 2047. Ministry and finance-wing clarifications released in related debates show the point is already under active scrutiny.

Bottom line

FHRAI’s intervention reframes a technical tax design choice as a strategic growth lever: If the objective is to deepen domestic tourism, broaden regional hotel capacity and preserve millions of livelihoods, then restoring parity in the tax architecture — or at a minimum issuing clear operational guidance — will likely be required.

The immediate ask is surgical: reinstate ITC (or offer an option with ITC) for the sub-₹7,500 slab and clear up compliance grey areas. Absent such fixes, the industry warns the result will be fewer investments in mid-market hotels, higher consumer prices, and a slower, more unequal tourism recovery.Read about our editorial guidelines and ethics policy