Hostel Accommodation and GST: AAR Ruling and its Implications

The Goods and Services Tax (GST) has brought about a comprehensive tax reform in India, impacting various sectors, including the hospitality industry. Recently, the Authority for Advance Rulings (AAR) in Tamil Nadu issued a significant ruling in the case of Lavender Residency, clarifying the GST implications of hostel accommodation. This article delves into the details of this ruling and its far-reaching implications for hostel operators across the country.

Background

Lavender Residency, a hostel for female college students and working women, sought an advance ruling from the AAR on the classification of their services under GST.

Their primary questions were:

• Whether accommodation provided by them falls under the exemption granted to "renting of a residential dwelling for use as residence" under GST.
• Whether their services attract registration under GST.
• The appropriate GST rate for their services, including in-house food supplied to inmates.

Key Findings of the AAR

• Hostel accommodation not exempt: The AAR ruled that hostel accommodation services are not equivalent to "renting of a residential dwelling for use as residence" and hence, not exempt from GST under Entry 12 of Notification No. 12/2017-Central Tax (Rate). This distinction rests on the temporary nature of stay, limited facilities, and shared accommodations in hostels, differing from a typical residential dwelling.
• Registration mandatory: As the services are not exempt, the AAR held that Lavender Residency is liable to register under GST if their aggregate turnover in a financial year exceeds twenty lakh rupees. This aligns with Section 22, read with section 7, of the CGST Act, 2017, making registration mandatory for any business providing taxable supplies.
• GST rate on hostel accommodation: The AAR classified hostel accommodation services under Heading No. 9963 and made them taxable at 18% under Notification No. 11/2017-Central Tax (Rate) as amended. This rate applies to services not otherwise specified in the notification.
• GST on in-house food: If included in the hostel fees, the supply of in-house food to inmates becomes part of a composite supply. In such cases, the GST rate of the principal supply, i.e., hostel accommodation (18%), will apply to the entire composite supply. This is based on Section 2(30) of the CGST Act, which treats bundled services as a single supply for tax purposes.

Implications for Hostel Operators

The AAR ruling has significant implications for hostel operators across India:

• Increased tax burden: Hostels previously relying on the exemption for residential dwellings will now face a 18% GST liability on their fees. This could potentially lead to increased costs for hostel residents.
• Registration requirement: Hostels with an annual turnover exceeding twenty lakh rupees must register under GST to comply with the law. This involves complying with various compliances like filing GST returns and maintaining proper records.
• Clarity on classification: The ruling provides much-needed clarity on the classification of hostel accommodation services under GST, removing uncertainties that existed earlier.
• Impact on pricing strategies: Hostels may need to re-evaluate their pricing strategies to factor in the additional GST cost. This could involve transparent communication with residents regarding the revised fee structure.

Moving Forward

While the AAR ruling brings clarity to the GST treatment of hostel accommodation, hostel operators need to carefully analyze its implications and take necessary actions such as:

• Assessing registration requirement: Determine if their annual turnover necessitates GST registration to avoid penalties for respective non-compliances.
• Update pricing and contracts: Update fees and contracts to reflect the new GST liability.
• Maintain proper records: Maintain records of income and expenses for compliance purposes.
• Seek professional guidance: Consult professionals for expert advice on complying with GST regulations.

The AAR ruling on Lavender Residency highlights the evolving landscape of GST regulations for the hospitality industry. While hostel operators will need to adjust to the increased tax burden and compliance requirements, it also underscores the importance of seeking clarity and adhering to the legal framework to avoid potential penalties and disruptions.