GST for Restaurants & Hotels: Rate Structure, ITC & Compliance in India

Overview of GST Rate Structure for Restaurants

The GST rate structure for restaurants in India has undergone significant changes since the inception of GST on 1 July 2017. The current framework, established through a series of notifications and GST Council recommendations, creates a clear distinction based on the type of restaurant and its association with hotel accommodation.

At Virtual Auditor, we have assisted hundreds of hospitality businesses in navigating these complexities. Understanding the rate structure is not merely about compliance — it is about making informed decisions that directly impact profitability.

The 5% GST Rate Without ITC

Under Notification 11/2017-CT(R) as amended by Notification 46/2017-CT(R), the following categories of restaurants are subject to GST at 5% without the benefit of Input Tax Credit:

• Standalone restaurants: All restaurants that are not located within a hotel premises, regardless of whether they are air-conditioned or non-air-conditioned
• Restaurants within hotels: Where the declared room tariff of the hotel does not exceed ₹7,500 per unit per day
• Food courts and cafeterias: Operating independently or within malls and commercial complexes
• Takeaway and delivery services: Food delivery services, whether through own platforms or aggregators like Swiggy and Zomato
• Sweet shops and bakeries: Where food is prepared and served on premises

The 5% rate applies to “restaurant services” as defined under the GST framework, meaning the supply of food and beverages for human consumption prepared in a restaurant, eating joint, or mess. This excludes alcoholic beverages, which remain outside the purview of GST and are taxed under state excise laws.

The 18% GST Rate With ITC

Restaurants located within hotels where the declared room tariff exceeds ₹7,500 per unit per day are subject to GST at 18%. However, these establishments enjoy full Input Tax Credit on all eligible inward supplies. This creates an important economic trade-off that hospitality businesses must carefully evaluate.

The 5% vs 18% Decision Matrix

The choice between operating under the 5% (no ITC) and 18% (with ITC) regimes is not merely a matter of applicable rates — it requires a detailed cost-benefit analysis:

• Input tax proportion: If ITC on purchases (raw materials, capital goods, services) exceeds approximately 13% of output tax at 18%, the 18% regime may be more beneficial
• Customer profile: Business clients who can claim ITC may prefer the 18% regime, while individual consumers are typically price-sensitive to headline rates
• Capital expenditure plans: Hotels planning significant renovations or expansions benefit from ITC on capital goods under the 18% regime
• Vendor profile: The proportion of GST-registered vendors in the supply chain affects the quantum of available ITC

GST on Hotel Accommodation

Hotel accommodation services are taxed under a separate rate structure based on the declared tariff per unit per day:

Current Rate Structure for Hotel Rooms

• Room tariff up to ₹1,000 per day: 12% GST (previously exempt, changed post-GST Council 47th meeting recommendations)
• Room tariff ₹1,001 to ₹7,500 per day: 12% GST with ITC
• Room tariff exceeding ₹7,500 per day: 18% GST with ITC

Declared Tariff vs Actual Transaction Value

A critical concept in hotel accommodation GST is the distinction between “declared tariff” and “transaction value.” The declared tariff refers to the charges for the room as published or displayed, including all charges but excluding GST. The applicable rate is determined by the declared tariff, but the tax is computed on the actual transaction value (the amount actually charged).

This means that even if a hotel offers a discount bringing the actual charge below the threshold, the rate applicable is based on the declared (rack) tariff. This nuance is frequently misunderstood and can lead to significant compliance issues if not properly managed.

Bundled Services in Hotels

Hotels often provide bundled packages that include accommodation, meals, spa services, and event facilities. Under GST, the treatment of bundled services follows the principles laid down in Section 2(30) of the CGST Act:

• Naturally bundled services: Where services are provided together in the ordinary course of business (e.g., room with complimentary breakfast), the entire bundle is taxed at the rate applicable to the principal supply
• Mixed supplies: Where services are not naturally bundled and can be supplied independently, each component is taxed at its respective rate

GST on Banquet & Conference Services

Banqueting and conference services represent a significant revenue stream for hotels and are subject to specific GST treatment under CGST Section 9.

Rate Applicable to Banquet Services

Banquet hall rentals and associated services provided by hotels are classified as “renting of immovable property” or “accommodation services” depending on the nature of the arrangement:

• Pure banquet hall rental: Taxed at 18% GST with ITC eligibility
• Banquet with catering (composite supply): If the principal supply is restaurant service, 5% without ITC applies; if the principal supply is venue/accommodation, 18% with ITC applies
• Outdoor catering services: 5% GST without ITC (as per Notification 11/2017-CT(R) as amended)

Event Management and Ancillary Services

Services such as decoration, sound & lighting, photography, and event management provided in conjunction with banquet services are taxed at 18% GST. When these are part of a composite supply with banqueting, the rate of the principal supply applies.

Input Tax Credit (ITC) Rules for Hospitality

The ITC framework for the hospitality industry is governed by Sections 16 to 21 of the CGST Act. Given the distinction between 5% (no ITC) and 18% (with ITC) regimes, proper ITC management is critical for hospitality businesses.

ITC Eligibility Under the 18% Regime

Hotels operating under the 18% GST rate can claim ITC on:

• Raw materials and ingredients for food preparation
• Capital goods including kitchen equipment, furniture, and fixtures
• Renovation and interior decoration expenses
• Utility services (electricity, water, gas) where GST is charged
• Professional and consultancy services
• Linen, crockery, cutlery, and other consumables
• Marketing and advertising services
• Technology and software services

Blocked ITC for Hospitality

Under Section 17(5) of the CGST Act, certain inputs are specifically blocked from ITC claims regardless of the applicable rate:

• Motor vehicles and conveyances (except when used for specific purposes)
• Food and beverages where supplied as an employee benefit (unless obligatory under law)
• Club memberships and fitness facilities for employees
• Travel benefits extended to employees on vacation
• Works contract services for construction of immovable property (except plant and machinery)

Proportional ITC for Mixed-Use Establishments

Hotels that operate both restaurant services (5% without ITC) and accommodation services (12%/18% with ITC) must maintain a proportional ITC mechanism under Rule 42 and Rule 43 of the CGST Rules. This involves:

• Identifying common inputs used across both taxable and non-ITC-eligible supplies
• Calculating the proportional ITC based on the ratio of taxable turnover eligible for ITC to total turnover
• Making annual adjustments and reversals as required

GST Compliance Requirements for Restaurants & Hotels

Registration Requirements

Under Section 22 of the CGST Act, restaurants and hotels must obtain GST registration if their aggregate turnover exceeds ₹20 lakh (₹10 lakh for special category states). Key registration considerations include:

• Multiple registrations: Hotels with branches in multiple states must obtain separate registrations in each state
• Composition scheme eligibility: Restaurants with turnover up to ₹1.5 crore can opt for the composition scheme at 5% (but with significant restrictions on ITC and inter-state supply)
• E-commerce operators: Restaurants supplying through platforms like Swiggy and Zomato have specific registration and compliance obligations

Return Filing Obligations

Hospitality businesses must file the following GST returns:

• GSTR-1: Monthly or quarterly (for businesses under QRMP scheme) outward supply details
• GSTR-3B: Monthly or quarterly summary return with tax payment
• GSTR-9: Annual return
• GSTR-9C: Reconciliation statement (if turnover exceeds ₹5 crore)

E-Invoicing for Hospitality

Hotels and restaurant chains with aggregate turnover exceeding ₹5 crore are required to generate e-invoices through the Invoice Registration Portal (IRP). This applies to all B2B supplies and exports, and the threshold has been progressively lowered by the government.

TCS by E-Commerce Operators

Under Section 52 of the CGST Act, e-commerce operators (food delivery aggregators) are required to collect Tax Collected at Source (TCS) at 1% (0.5% CGST + 0.5% SGST) on the net value of taxable supplies made through their platform. Since 1 January 2022, food delivery platforms also collect and pay GST on behalf of restaurant partners under Section 9(5) of the CGST Act.

GST on Specific Hospitality Services

Cloud Kitchen and Virtual Restaurants

Cloud kitchens — delivery-only food preparation facilities without dine-in service — are treated as restaurant services under GST. They are subject to 5% GST without ITC, regardless of whether they operate under their own brand or as virtual restaurants on aggregator platforms.

Room Service and Mini-Bar

Food and beverages served through room service in hotels follow the same GST treatment as restaurant services within that hotel. Mini-bar consumables (excluding alcoholic beverages) are treated as part of the accommodation service if included in the room tariff, or as a separate supply if billed independently.

Spa, Gym & Wellness Services

Spa and wellness services provided within hotel premises are classified under SAC 999722 (beauty and physical well-being services) and attract 18% GST with ITC eligibility. When bundled with accommodation as part of a package, the treatment depends on whether the supply qualifies as a composite or mixed supply.

Liquor and Alcoholic Beverages

Alcoholic liquor for human consumption is constitutionally excluded from GST (Article 366(12A)). Restaurants and hotels must maintain separate billing and accounting for alcoholic beverages, which remain subject to state excise duty and VAT. This separation is crucial for accurate GST compliance and ITC computations.

Common GST Issues in the Hospitality Industry

Classification Disputes

Some of the frequent classification issues we encounter in our GST advisory practice include:

• Whether a supply constitutes “restaurant service” or “outdoor catering service”
• Classification of bundled hotel packages (accommodation + meals + events)
• Treatment of service charges (voluntary vs mandatory) under GST
• GST on complimentary services provided to loyalty programme members

Place of Supply Issues

Under Section 12(3) of the IGST Act, the place of supply for restaurant services is the location where the services are performed. For hotel accommodation, it is the location of the immovable property. This is generally straightforward, but complications arise in scenarios involving:

• Centralised billing for hotel chains across states
• Corporate contracts with pan-India hotel partnerships
• Online travel agent (OTA) commissions and their place of supply

Reverse Charge Mechanism

Hotels and restaurants must account for Reverse Charge Mechanism (RCM) on specific inward supplies under Section 9(3) and 9(4) of the CGST Act, including:

• Legal services from advocates
• Security services from manpower agencies
• Renting of motor vehicles with specific conditions
• Services from unregistered persons (in specific categories)

Strategies for GST Optimisation in Hospitality

At Virtual Auditor, we help hospitality businesses implement tax-efficient structures through the following strategies:

• Entity structuring: Separating hotel and restaurant operations into distinct entities where the rate differential makes it economically beneficial
• Tariff engineering: Strategic pricing of room tariffs to optimise the applicable GST rate
• ITC maximisation: Implementing robust input tracking systems to ensure full ITC claims under the 18% regime
• Composite supply optimisation: Structuring bundled services to achieve the most favourable tax treatment
• Vendor management: Ensuring maximum GST-registered vendor coverage in the supply chain

Frequently Asked Questions

1. What is the GST rate for restaurants in India?

Standalone restaurants and those within hotels with room tariffs up to ₹7,500 per night pay GST at 5% without Input Tax Credit (ITC). Restaurants located in hotels with declared room tariffs exceeding ₹7,500 pay 18% GST with full ITC eligibility. This framework is governed by CGST Section 9 and Notification 11/2017-CT(R) as amended. For tailored advice on which rate structure best suits your establishment, consult our GST advisory team.

2. Can restaurants claim Input Tax Credit (ITC) under GST?

Only restaurants operating under the 18% GST rate (i.e., those located in hotels with declared room tariffs exceeding ₹7,500) can claim ITC on their input purchases. Restaurants paying 5% GST are explicitly barred from claiming ITC. This is a deliberate trade-off: the lower rate compensates for the loss of ITC. The economic viability depends on the proportion of taxable inputs — if ITC would exceed 13% of output liability, the 18% regime may actually be more tax-efficient.

3. How is GST calculated on hotel room tariffs?

GST on hotel rooms is determined by the declared tariff (published rack rate) but calculated on the actual transaction value. Rooms with declared tariffs up to ₹7,500 attract 12% GST, while those above ₹7,500 attract 18% GST. Both categories enjoy ITC eligibility. It is important to note that even if a discounted rate falls below the threshold, the applicable GST rate is determined by the declared tariff, not the discounted price.

4. What is the GST treatment for banquet and catering services?

Pure banquet hall rental attracts 18% GST with ITC. Outdoor catering services are taxed at 5% without ITC. When banquet and catering are provided as a composite supply, the rate of the principal supply applies. The classification depends on the nature of the dominant element — whether the customer is primarily paying for the venue or the food. Proper invoicing and contractual structuring can help optimise the tax treatment.

5. How does GST apply to food delivery through Swiggy and Zomato?

From 1 January 2022, food delivery platforms like Swiggy and Zomato are required to collect and deposit GST at 5% on food delivery services under Section 9(5) of the CGST Act. The restaurant is deemed to have made the supply through the e-commerce operator. Additionally, platforms collect TCS at 1% under Section 52. Restaurants must reconcile platform settlements with their GST returns to ensure accurate compliance.

6. Is GST applicable on service charges levied by restaurants?

Yes, service charges added by restaurants are part of the taxable value for GST purposes. Whether the service charge is voluntary or mandatory, if it forms part of the consideration for the supply of food, it is includable in the taxable value under Section 15 of the CGST Act. However, tips paid directly to staff by customers are not subject to GST as they are not consideration for a supply of services.

7. Can hotels opt for the composition scheme under GST?

Hotels with aggregate turnover up to ₹1.5 crore can opt for the composition scheme under Section 10 of the CGST Act. However, the composition scheme comes with significant restrictions: no ITC claims, no inter-state supplies, no supply through e-commerce operators, and a flat tax rate of 5% for restaurant services. For most hotels with mixed revenue streams, the regular scheme is typically more advantageous, and we recommend a detailed analysis before opting in.