The GST 2.0 structure has simplified tax rates but created a paradox for hostel and budget accommodation operators: for units priced at ₹7,500/day or less, the government mandates 5% GST without ITC, explicitly forbidding the option to charge 18% with ITC. While this keeps guest pricing low, it compresses margins and embeds cascading tax costs for operators.
The good news: with smart operational structuring, you can recover 3–5% of margins without violating GST law. This guide provides practical do’s & don’ts, illustrative examples, and a visual cheat sheet for hostels, PGs, and budget shelters to optimize GST efficiency.
Mandatory GST Rule
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Accommodation ≤ ₹7,500/day → GST 5% without ITC
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18% with ITC is explicitly not allowed, even for agent bookings
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Applies to hotels, hostels, PGs, and shelters
Illustrative Example:
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150-bed PG, ₹15,000/month per bed
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Annual revenue: ₹3.69 Cr
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Output GST at 5%: ₹18.45 L
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Input GST on rent/utilities: ₹5.4 L (non-recoverable)
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Margin impact: -1.46%
Bottom line: Operators must work within 5% GST; no higher rate option exists.
Why 18% With ITC Sounds Better But Is Blocked
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Removes cascading GST, improves operator margins
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Guests would pay slightly more → government avoids this to maintain “affordability” narrative
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Mandatory 5% compresses margins but keeps guest pricing low
Practical Alternatives (Do’s & Don’ts With Examples)
A. Leave-and-License Agreement
Do:
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Convert leases to leave-and-license
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Ensure property is residential dwelling
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Maintain written agreements with landlords/agents
Example:
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Annual rent ₹12 L
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GST under lease (18%) → ₹2.16 L lost
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GST under leave-and-license → ₹0
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Margin gain: +1.2%
Don’t:
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Treat temporary stays as lease
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Skip proper documentation
B. Entry 12AA Exemption (Long Stay ≥90 Days)
Do:
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Minimum stay ≥90 days
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Charges ≤ ₹20,000/month/person
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Supply to individuals only
Example:
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Revenue ₹3.69 Cr, 70% occupancy
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Output GST 5% = ₹18.45 L
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Entry 12AA exemption → GST = 0
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Margin recovery: +5–6%
Don’t:
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Split stays into short-term stays
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Offer daily-variable rates to claim exemption
C. Separate Optional Services (Meals, Laundry)
Do:
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Invoice optional services separately from accommodation
Example:
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Accommodation ₹12,000/month → 0% GST
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Meals ₹3,000/month → 5% GST = ₹150
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Guest only paying for meals → core room remains exempt
Don’t:
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Bundle meals with rent → entire supply taxed
D. Agent Bookings
Do:
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Agents handle bookings/facilitation separately
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Room structured under leave-and-license + Entry 12AA
Example:
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Agent fee ₹500/month per bed → GST 5% = ₹25
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Room rent remains exempt
Don’t:
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Mix agent fee with rent
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Circumvent minimum stay rules
Stepwise Strategy & Illustrative Margin Impact
| Step | Do | Savings/Impact | Don’t | Margin Effect |
|---|---|---|---|---|
| 1 | Leave-and-license | Rent ₹12 L → save ₹2.16 L | Keep as lease | +1.2% |
| 2 | Entry 12AA ≥90-day stay | GST 0 on ₹3.69 Cr revenue | Split stays | +3–5% |
| 3 | Separate optional services | Meals ₹3,000 → GST ₹150 only | Bundle meals | +0.5–1% |
| 4 | Agent bookings | GST only on agent fee | Mix agent fee with rent | Operational simplicity |
Combined effect: Recover 3–5% of lost margins, reduce cascading GST, remain compliant.
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Room rent structured as residential leave-and-license → GST 0
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Guests staying 90+ days → Entry 12AA exemption → GST 0
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Optional meals/laundry → taxed separately → minimal GST
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Agent booking fees → taxed separately → compliance-friendly
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Result: 3–5% margin recovery without violating GST law
Key Takeaways
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Mandatory 5% GST without ITC; 18% with ITC not allowed
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Margin recovery strategies:
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Leave-and-license agreements
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Long stay exemption (Entry 12AA)
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Separate optional services
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Agent facilitation fees
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Document everything – agreements, invoices, policies
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Adjust policies to guarantee long-term stays
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Optional services separation avoids cascading GST
Bottom Line:
Even under mandatory 5% GST, hostels, PGs, and budget shelters can recover 3–5% of margins, reduce cascading costs, and remain fully compliant by combining these strategies.
