GST on Restaurant Services from ‘Specified Premises’ – In-depth Analysis of Key Changes.

The Central Board of Indirect Taxes and Customs (CBIC) has notified significant changes in the GST treatment of restaurant services offered from "specified premises" — typically hotels, inns, clubs, or resorts providing accommodation services. These changes are effective from 1st April 2025, introduced through Notification No. 3/2024-Central Tax (Rate) and clarified through CBIC FAQs dated 28th March 2025.

In this article, we dissect the background of these amendments, the precise nature of changes, their applicability, and evaluate whether opting for “specified premises” status is beneficial from a business standpoint.

I-Background

When GST was rolled out in 2017, restaurant services were taxed based on the nature and location of operations. The broad classification was:

1. Standalone Restaurants:

These included food outlets not attached to any accommodation facility. These were taxed at:

• 5% GST (without Input Tax Credit or ITC).

2. Restaurants in Specified Premises (Hotels, Resorts, Clubs, etc.):

If a restaurant was housed within a hotel or similar establishment offering lodging, and if the hotel met the criteria of “specified premises,” the GST rate applicable was:

• 18% GST (with ITC benefit).

The rationale was that high-end hotels were better placed to manage credit chains, and the ITC mechanism ensured tax neutrality.

II-The Concept of "Specified Premises" under GST (Pre-2025)

Until 31st March 2025, whether a hotel was classified as a specified premises depended on its declared tariff:

• If the declared tariff of any accommodation unit was Rs 7,500 or more per night, the hotel became a specified premises.
• Accordingly, restaurant services from such premises attracted 18% GST with ITC.
• In all other cases, the restaurant charged 5% GST without ITC.

Problems with the “Declared Tariff” Approach

Over the years, several challenges emerged with the reliance on declared tariff:

A. Inconsistent Tariffs Across Booking Channels:

• Hotels often published different tariffs on their websites, third-party platforms (MakeMyTrip, Booking.com, etc.), or through travel agents.
• A hotel might declare Rs 8,000 per night on its website but offer steep discounts through other channels, leading to real-world room charges of Rs 5,000–Rs 6,000.
• This inconsistency led to disputes between taxpayers and authorities over whether a premise should be considered “specified.”

B. Ambiguity in Interpretation:

• There was confusion on what exactly constituted the declared tariff: Was it the rate on the brochure, website, or the price charged at the counter?
• This made uniform application of GST difficult and prone to litigation.

C. Frequent Tariff Fluctuations:

• Declared tariffs could vary with seasons, special events, or offers.
• A room might have a declared tariff of Rs 7,800 in the high season and Rs 6,000 in the low season, further muddying the waters.

These issues undermined tax certainty and created operational difficulties for businesses.

III-The Shift – From Declared Tariff to Actual Charges (Effective 01.04.2025)

To address the above complications, the government introduced a crucial shift in policy effective from 1st April 2025.

Key Change:

The classification of a hotel as a 'specified premises' will now be based on the actual charges collected during the preceding financial year, not the declared tariff.

New Rule:

• If any accommodation unit was supplied at Rs 7,500 or more per room per night (excluding taxes and discounts) at any time during the preceding financial year, the hotel will be mandatorily treated as a specified premises for the current financial year.
• If no such room was sold above Rs 7,500 in the previous year, the hotel will not be a specified premises unless it opts in voluntarily.

IV-What Happens If You Qualify as a “Specified Premises”?

If a hotel qualifies as a specified premises, the following implications apply:

This rate is irrespective of whether the restaurant and the hotel are run by the same entity or different entities.

V-Declaration Requirements – Opt-In / Opt-Out Mechanism

The CBIC has laid out a clear declaration-based mechanism to ensure classification is based on taxpayer actions and data:

A. Who Must File the Declaration?

• The accommodation service provider (i.e., the hotel or resort) must file the declaration.
• If the hotel qualifies mandatorily (due to actual charges above Rs 7,500 in the previous FY), then no option exists – it automatically becomes a specified premises.

B. For Voluntary Opt-In:

If a hotel did not meet the Rs7,500 condition in the preceding FY but wants to voluntarily opt-in and charge 18% GST with ITC for its restaurant operations, it must:

• File a declaration before 31st March of the preceding FY.
• For newly registered hotels, the declaration must be filed within 15 days of registration.

Once opted in, this classification remains valid until the taxpayer opts out.

C. Opt-Out Provision:

• A hotel can opt-out of specified premises classification by filing a declaration between 1st January and 31st March of the preceding FY.
• Once opted out, it will be treated as a non-specified premise for the following FY (5% GST, no ITC).
• Similar to opt-in, opt-out remains valid until changed again.

VI-Special Cases and Compliance Considerations

1. Multiple Premises with Same GSTIN:

• If a taxpayer operates multiple hotels under a single GST registration, declaration is required separately for each premise.
• The requirement becomes mandatory only for the premises where accommodation was supplied at Rs 7,500 or more in preceding FY.

2. Third-party Restaurant Operators within Hotels:

• If a restaurant is run by a different entity within a hotel that qualifies as specified premises: 
  • The restaurant operator must mandatorily charge 18% GST with ITC.
  • The accommodation provider’s declaration applies to the restaurant within its premises, irrespective of ownership.

VII-Should Businesses Opt for “Specified Premises” Status?

The decision to opt into “specified premises” classification has significant financial and strategic implications:

Pros:

• Eligibility to claim ITC on input goods and services, reducing effective tax cost.
• Better suited for high-end establishments catering to premium clientele.
• Avoids classification disputes and provides clarity.

Cons:

• Higher tax burden (18%) on customers if they are price-sensitive.
• Businesses operating on thin margins or with high discounts may prefer the 5% rate.

Businesses should analyze their clientele, pricing trends, and ITC eligibility before opting in or out. A data-backed approach, using past financials, can help make the right decision. With proper planning, hotels and restaurants can align their GST practices to optimize tax positions while maintaining regulatory compliance.

CA. Shreeharsha

GST Litigation Expert

Shreeharsha@sreshtaglobal.com

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