This article on ‘GST Impact: Hostel and PGs now subject to 12% Tax’ was written by Akash Sharma, an intern at Legal Upanishad.
Uniting India’s diverse market under a simplified and unified tax structure, GST has revolutionized the stride toward achieving the vision of One Nation, One Tax, and One Market. The tax system in India is a multifaceted structure, encompassing a wide array of taxes imposed by both the Central and State Governments. The tax system in India can be broadly classified into two main categories namely, direct and Indirect tax. Goods and Service Tax (GST) is a comprehensive indirect tax system aimed at creating a single national marketing by eliminating the cascading effect of taxes.
Recently, the Authority for Advance Rulings (AAR) issued a ruling that has led to the imposition of certain rates for Paying Guests (PGs) and hostels, resulting in higher rent for students. The AAR’s decision has raised concerns among students as it may increase the financial burden on those seeking accommodation in PGs and hostels.
This article offers a comprehensive study on GST, covering its background, concept, various tax rates, relevant judicial decisions, and practical case studies. The primary focus lies in the area of GST implementation affecting Paying Guests (PGs) and Hostels, specifically exploring its impact on students. Additionally, the article outlines potential measures to mitigate any challenges arising from this implementation, providing valuable insights into overcoming hindrances faced by students and accommodation providers.
GST’s journey began in 1954 when France adopted it, influencing over 160 countries globally. Malaysia implemented it in 2015, and India followed in 2017 with a dual tax structure. The genesis of GST can be traced back to the year 2000 in India, over two decades before the present time.
During the tenure of Atal Bihari Vajpayee’s ruling government, an empowered committee comprising distinguished state finance ministers, who had prior experience, was established in 2004. This committee ardently advocated the implementation of GST at the state level. Subsequently, the Fiscal Responsibility and Budget Management Committee took up the reins and continued the push for GST implementation.
However, GST was announced for implementation on April 1, 2010, but due to delays, it was proposed for April 2011. In 2011, the Constitution (115th Amendment) Bill was introduced in the Lok Sabha and later notified as the Constitution (101st Amendment) Act in 2016. GST was officially rolled out on July 1, 2017. Subsequent years saw various amendments, provisions like TDS, e-way bills, and COVID-19 relief measures in 2020. In 2021, GSTR-8 and GST on services by state governments to their undertakings were introduced, showcasing GST’s evolution and improvements in India’s tax landscape.
GST – Meaning and Concept
GST or Goods and Service Tax is the comprehensive indirect tax levied on the supply of goods and services. With its implementation, a single tax has been levied upon goods and services which eliminated most of the prior indirect taxes that were levied. The introduction of GST marked a significant indirect tax reform in the country. This transformative measure aimed to simplify and streamline the taxation system, fostering economic growth and efficiency.
India follows a multi-tiered GST structure comprising Integrated Goods and Services Tax (IGST), State Goods and Services Tax (SGST), Central Goods and Services Tax (CGST), and Union Territory Goods and Services Tax (UTGST). These taxes are applicable at different rates to goods and services. IGST applies to interstate transactions and imports/exports, while SGST and CGST are levied on intrastate transactions within a state, with CGST collected by the Central Government and UTGST collected by the Union Territory government in specific regions.
GST registration is mandatory for various entities and individuals, such as e-commerce aggregators, those paying tax through the reverse charge mechanism, agents of input service distributors and suppliers, non-resident individuals paying tax, businesses with turnover above the threshold limit, and individuals registered before the GST law’s introduction. This ensures compliance with tax regulations and promotes an efficient and accountable tax system.
GST rates in India are categorized into five main slabs: 0%, 5%, 12%, 18%, and 28%. Certain goods and services are exempt from GST, and the rates are subject to periodic review by the GST Council based on economic conditions and revenue needs.
APPLICABILITY ON HOSTEL AND PG
Under the ambit of GST, hostels and PG accommodations are considered part of the accommodation services sector. Notably, a recent ruling has revoked the GST exemption for hostel accommodation. The Authority of Advance Ruling (AAR) made this decision after the government lifted the GST exception for hostels and guest houses with rents up to Rs. 1000 per day.
This development indicates a broader change in the taxation landscape for the hospitality industry, warranting attention and compliance from stakeholders in the accommodation sector. However, since July 17, 2022, hostel rent has been subject to GST as the previous exemption was no longer applicable after that date.
With the Implementation of this ruling, a rate of 12% GST would be implemented over the rent of the Hostel and PG accommodations. As per the ruling by the Karnataka Authority for Advance Ruling (AAR), GST on reverse charges will apply to the rental payments made by hostel operators to landowners. The AAR has clarified that the services provided by the hostel operator are subject to GST, necessitating the hostel operator to obtain GST registration.
However, the ruling also states that rent for residential dwellings is exempt from GST, but this exemption does not apply to guesthouses, lodges, or similar accommodations. The AAR also categorizes facilities such as washing machines and TVs as separate taxable services, mandating hostels to pay GST on their provision in addition to the rent. This ruling has important implications for the hospitality industry, necessitating adherence to GST regulations to ensure proper tax compliance.
The ruling by the Bengaluru bench of the Authority of Advance Ruling (AAR) states that hostels do not meet the criteria for residential dwelling units. Consequently, they are ineligible for exemption from the Goods and Services Tax (GST). The Authority of Advance Ruling of Karnataka ruled recently on the case of a service apartment provider known to be the Srisai Luxurious Stays, based in Bengaluru.
The ruling stated that if an accommodation offers a room shared by strangers and lacks an individual kitchen facility, it cannot be considered a residential dwelling. The Karnataka AAR ruled that the applicant’s PG/hostel services, akin to guest house and lodging services, do not qualify as a ‘residential dwelling’ meant for a permanent stay.
In a separate case involving V S Institute & Hostel Pvt. Ltd based in Noida, the Lucknow bench of the Authority of Advance Ruling (AAR) ruled that GST would apply to hostel accommodation with a daily cost below Rs. 1000.
The implementation of GST on hostels and PG accommodations in India has both positives and negatives. Some of the cons include increased cost burden for owners, complexity in compliance due to multiple services offered, the potential impact on affordability for students and young professionals, disparities in taxation based on location and amenities, the administrative burden on small operators, a potential decline in the unorganized sector, and implications on rental agreements. Despite its advantages in streamlining the tax system, addressing these challenges requires government support and clearer regulations for the hospitality sector.
When implementing GST on PG and hostel accommodations, considering the unique characteristics of the sector and its impact on operators and residents is crucial.
To ensure a smoother implementation, suggestions include:
- Setting a threshold exemption for small-scale operators,
- introducing a simplified tax structure,
- providing clarity on the input tax credit,
- differentiating tax rates for shared and single accommodations,
- encouraging digital transactions,
- conducting awareness campaigns,
- supporting the unorganized sector,
- offering special provisions for student accommodations,
- engaging with stakeholders, and
- conducting periodic reviews for necessary adjustments.
A balanced and pragmatic approach will foster compliance and benefit both operators and residents.
In conclusion, the imposition of GST on PG and hostel accommodations in India brings both opportunities and challenges. While it streamlines the tax system and promotes transparency, it may also increase the compliance burden for small operators and impact affordability for residents. To ensure a successful implementation, policymakers must consider the sector’s unique characteristics and adopt a balanced approach. Setting a threshold exemption for small-scale operators, introducing a simplified tax structure, and providing clarity on input tax credits are essential steps to ease compliance.
Encouraging digital transactions, offering incentives, and conducting awareness campaigns will promote transparency and reduce tax evasion. Moreover, supporting the unorganized sector and considering special provisions for student accommodations can foster growth and affordability. Engaging with stakeholders and conducting periodic reviews will facilitate necessary adjustments based on industry feedback and changing dynamics.
Ultimately, a collaborative and pragmatic approach will ensure that GST implementation benefits both operators and residents, contributing to a more organized and transparent hospitality sector in India.
- “History of GST in India”, BankBazaar, available at: https://www.bankbazaar.com/tax/history-of-gst.html (last visited on 2nd August 2023)
- “Hostel stays, and PGs in Bengaluru are now taxable under 12% GST, Indian Startup News”, 31 July 2023, available at :https://indianstartupnews.com/news/hostel-stays-and-pg-accommodations-in-bengaluru-are-now-taxable-under-12-gst (last visited on 2nd august 2023)