Hotel guests may not gain much from GST rate cut

The decision to hike hotel room rates by hospitality chains has raised another concern in the market – will the benefits from the recent reduction in goods and services tax (GST) rates on hotel room tariff be passed on to customers? There are apprehensions that hiking room tariffs between 4% and 15% starting October 1, 2019, will basically negate the GST rate cut, as a result there will be no change in pricing for customers booking hotel rooms October onwards.

Last week, finance minister Nirmala Sitharaman announced GST rate cuts from 28% to 18% for rooms priced above Rs 7,500 per night and from 18% to 12% for rooms under 7,500 per night. Hotel rooms priced below Rs 1,000 will have no GST. While hotel executives are certain that hotel guests will benefit from the GST rate cuts, they say the two developments (GST rate cuts and hike in room tariffs) cannot be interrelated.

Speaking to DNA, Sanjay Sethi, Managing Director and Chief Executive Officer, Chalet Hotels, said the price hike is independent of GST cuts. "All GST benefits will go to the consumers/ the guests otherwise hotels will get into anti-profiteering issues. However, there could be some opaqueness when travel agencies and online travel agents (OTA) bundle up and sell to consumers/ guests. That's where we recommend booking directly with the hotels. The room rate hike has got nothing to do with GST cuts. The annual price increases will continue to happen," said Sethi.

Hotelilers said the GST cuts have come just ahead of hotel industry's annual practice of increasing hotel room tariffs for the business season. "This question would not have been asked if the rate cuts were announced in July which is an off-season. In fact, a rate cut then would have helped make hotels more affordable and create demand from corporate and individual travellers alike. While the industry is considering a price hike, the overall market sentiments are still not looking up. I think, hotels will evaluate their price hike decision in the first few weeks and take a final call to stay with the hike or go back to old rates," said a hotelier.

Patanjali Keswani, Chairman and Managing Director of Lemon Tree Hotels, said, "The hotel chain will definitely pass on the benefits to the customer and promote demand."

Some hoteliers said that there is a possibility few hotels may only partially pass the benefits to the guests. According to Himmat Anand, founder of Tree of Life Resorts & Hotels, for a Rs 10,000 room the guest was earlier paying Rs 12,800 (including 28% GST) but that will now come down to Rs 11,800 (including 18% GST).

"Because the guest was already used to paying a higher amount, some hotels may look to increase their rate by 5% and only pass on 5% benefit to the guests. I hope this doesn't happen, but I know it will happen because hotels will try to increase their profitability and bottomline. This will be very harmful for the industry because the market today is very tight and I honestly don't think the picture is that rosy. It will still take a year at least for the business to pick up," said Anand adding that guests at his resorts will get full rate cut benefits.

Unlike fast moving consumer goods companies, hotel rooms don't have a maximum retail price tag. For retail customers/ guests, hotels follow the dynamic pricing strategy wherein the revenue management system throws up the room tariffs at the time of making the booking after taking into account the demand for rooms and its availability in the hotel. Higher the availability, lower is the room tariff and vice-versa.

Sarbendra Sarkar, Managing Director and Founder, Cygnett Hotels & Resorts, has, in fact, decided not to hike room rates as market sentiments are not favourable. "Hospitality industry runs on demand and supply and would definitely pass on the benefit to the travellers," he said.

Industry players said GST rate cut will increase demand and make hotels more affordable to the consumers/ guests. The gap between premium and mid segment hotels will reduce considerably. As a result, people will upgrade to better quality hotels because the 10% differential in tax will be a big boost for the higher end hotels. Also, since the total spend by corporates or individual travellers will be lower, they might look at longer hotel stays, spur demand and thereby hotel occupancy levels.