Why Hotel Stays Haven’t Become Cheaper Despite GST Rate Cuts — Here’s What’s Really Happening

GST on Hotels:
When the government reduced GST rates on hotel rooms from 18% to 5% effective September 22, 2025, travelers across India expected a noticeable drop in hotel tariffs. However, reality has turned out quite different. Guests are reporting that hotel bills remain largely unchanged, leaving many wondering why the benefit of the tax cut hasn’t reached customers.

Travellers’ Expectations vs Reality

Soon after the GST revision, social media was filled with complaints from regular travelers. Many pointed out that despite the lower GST rate, their hotel bills looked almost the same as before.

For instance, Harshdeep Rupal, a frequent traveler who regularly stays at a hotel in Amritsar, shared his experience. He said that a room that usually costs between ₹5,500 and ₹6,500 per night still cost him ₹5,581 — almost the same as before the GST cut. He expected a lower bill since the GST rate on rooms below ₹7,500 had dropped from 18% to 5%, but there was no visible difference.

This has raised a simple question: Why hasn’t the GST cut made hotel stays cheaper?

The Real Reason: No More Input Tax Credit (ITC)

While the government did lower the GST rate, it also introduced an important change that offset the potential benefits. Under the new rules, hotels and travel aggregators can no longer claim Input Tax Credit (ITC) on their expenses.

Previously, hotels and online booking platforms such as MakeMyTrip, Goibibo, and others could claim ITC on taxes paid for operational costs — like electricity, rent, maintenance, furniture, and supplies. This system allowed them to adjust part of their tax burden and offer customers better pricing.

Now, under the 5% GST regime, ITC is not permitted. That means hotels cannot reclaim the taxes they pay on their own inputs and services. As a result, to recover their costs, most hotels have increased their base room rates — effectively neutralizing the impact of the GST reduction.

Industry Reaction: Heavy Burden on Budget and Mid-Segment Hotels

The Federation of Hotel and Restaurant Associations of India (FHRAI) has written to the government expressing concern over the new structure. According to the association, mid-range and budget hotels — which form the backbone of domestic tourism — are the most affected.

FHRAI President Surendra Kumar Jaiswal explained that the removal of ITC has made hotel projects significantly costlier. For example, if a hotel spends ₹1 crore on renovation, it will now incur ₹18 lakh in GST that cannot be claimed back, adding directly to costs and reducing profit margins.

This situation, the FHRAI warns, could slow down new hotel investments and hurt ongoing operations. The inability to offset tax expenses means hotels are compelled to pass the added burden to customers, nullifying any benefits of the GST cut.

Tax Experts Raise Red Flags

Tax analysts echo similar concerns. They say that the revised GST structure, though designed to simplify compliance and attract customers, may end up stalling the growth of the hospitality sector.

Budget and mid-segment hotels, in particular, are likely to face rising operational costs, limiting their ability to reduce tariffs. Experts caution that if this trend continues, hotel pricing could remain stagnant, and even premium properties might face pressure to increase rates during the busy festive and tourist seasons.

Tourism Boom at Risk

According to FHRAI, India’s domestic tourism sector has witnessed a sharp rebound, with domestic spending crossing ₹16 lakh crore in 2024. However, if the tax burden on the hotel industry continues to rise, this growth momentum could slow down — potentially impacting millions of jobs tied to hospitality and tourism.

Industry insiders also fear that smaller operators and local hotels may struggle to survive if operational costs keep climbing. This could lead to consolidation in the industry, where only larger hotel chains with higher margins can stay competitive.

Bottom Line

While the GST rate cut on hotel rooms was expected to make stays more affordable, the withdrawal of Input Tax Credit has canceled out those benefits. Hotels are now forced to absorb or pass on the additional costs to guests, resulting in little to no change in final room prices.

Unless the government revisits its ITC policy or provides an alternative relief mechanism, travelers are unlikely to see cheaper hotel rates anytime soon — even with a lower GST slab.