The Indian Goods and Services Tax (GST) Council has imposed a 12 percent tax on small hotels and accommodation facilities with room charges of up to INR1,000 per day effective from 18 July 2022, hampering the recovery of budget hotels in India.
According to Anjali Singh, Consumer Analyst at GlobalData, the move will be a heavy blow to India's budget hotel industry, which saw annual revenues drop by 70 percent in 2020 due to the COVID-19 pandemic.
In 2021, the hotel industry recovered as the intensive national vaccination program, and the subsequent easing of COVID-19 restrictions boosted consumer confidence. This positive consumer sentiment overflowed into 2022, with 51 percent of Indian respondents in GlobalData's Q2 2022 survey describing their spending on hotels and accommodation as being relatively or very high, compared to 49 percent of respondents in the Q1 2022 survey.
"The revival in domestic tourism has fuelled the demand for affordable leisure and homestay accommodations, thereby spurring the recovery of the budget hotels. Consequently, the overall revenue of the Indian budget hotels skyrocketed annually by 147 percent in 2021. The average daily rate of budget hotels also rebounded by 15.4 percent in 2021."
"However, the GST Council's decision to impose a 12 percent tax on hotels, lodges and clubs with daily room rent of INR1,000 or less will push up the overall travel costs for low-budget guests, who are already tackling spiralling food and fuel inflation. As a result, guest traffic will be redirected to small-scale hotels with annual revenues under INR2 million, which are exempted from GST. In areas where such facilities are insufficient or inadequate, travellers may be tempted to seek unregulated accommodation or even curtail their travel plans."
The skyrocket in room rent will disrupt the recovery of budget hotels, many of which are on the brink of shutting down permanently during the pandemic's peak. Despite this, the overall Indian hospitality sector will continue to grow in 2022 as domestic travel increases and Indians welcome staycations, pilgrimages, weekend leisure trips, and social gatherings back into their lives after a two-year hiatus.
