Input Tax Credit for the Hotel Industry 2026: Rooms, Food Bills & the 5% Trap

Input tax credit for the hotel industry is really two questions, asked by two completely different people. A hotel finance team working out what credit the property can take, and a company finance team working out whether the GST on last month’s hotel and restaurant bills is recoverable. The answers are different, and neither is in the rate table. What decides it is section 17(5), the place-of-supply rule, and the credit the 5% slab quietly costs the property that charges it.

By Hardik Garg · Founder & Senior Advisor, Saarthi Advisory · Updated August 2026 · 9 min read

Two questions, two different answers

“Can I claim ITC on a hotel bill” means one thing to a hotelier and something else entirely to a company controller. Sorting out which question you are asking is most of the work:

• The supply side. You run the property. The question is what credit you can take on the goods and services you buy, given the rate you charge on rooms and food.
• The buying side. Your staff travelled, stayed, ate. The question is whether the tax on those invoices reduces your own liability, or is simply a cost.

These are governed by different provisions and they can point in opposite directions on the very same invoice. A premium hotel takes full credit on its inputs and charges you 18% — and you may still be unable to claim a rupee of it. This guide takes them in turn. If you need the rate slabs and classification rules first, they are in our GST guide for hotels and restaurants.

What a hotel can claim, and the 5% trap

Since 22 September 2025, under Notification 15/2025-Central Tax (Rate), accommodation is taxed on the value of supply per unit per day:

• Up to Rs 7,500 — 5%, without input tax credit (cut from 12%).
• Above Rs 7,500 — 18%, with full input tax credit.

Note there is no exemption floor, whatever you may still read elsewhere. The old exemption for tariffs under Rs 1,000 a day was withdrawn on 18 July 2022, when Notification 04/2022-Central Tax (Rate) omitted entry 14 of Notification 12/2017-Central Tax (Rate). Every rupee of room revenue has been taxable since. A surprising number of rate tables online still show a nil band; they are quoting a rule that died four years ago.

Read the middle line again, because the headline “GST cut to 5%” buried the expensive half of it. The 5% rate is conditional on the supplier not taking credit. A property sitting in that band charges guests less and simultaneously forfeits credit on everything it buys to deliver the service — linen, housekeeping, utilities, OTA commission, maintenance, agency staffing, furniture.

For a mid-market property the input GST written off under the 5% slab frequently exceeds the tax saved on the room rate. The cut was a benefit to the guest, not to the hotel.

So the real planning question for a property near the line is not “what rate do I charge” but “which side of Rs 7,500 is my business actually on, and have I modelled the credit loss”. A property averaging Rs 7,200 a night is giving up its entire input credit chain to sit one band down. That arithmetic deserves a spreadsheet, not an assumption, and it needs redoing whenever pricing strategy changes.

Above Rs 7,500 the position is straightforward: charge 18%, take credit on inputs used for the taxable supply, subject to the ordinary blocks in section 17(5). The usual recoveries hotels miss here — furniture and equipment, pre-opening costs, the line between blocked construction credit and claimable fit-out — are covered in the main hospitality guide.

The Safari Retreats reversal, which every hotel should know about

In Safari Retreats (October 2024) the Supreme Court read section 17(5)(d) as it was actually drafted, “plant or machinery”, and held that a building constructed for letting out could itself qualify as a plant. That opened the door to construction credit, and hospitality and mall owners relied on it heavily.

The Finance Act 2025 reversed it retrospectively. It substituted “plant and machinery” for “plant or machinery” in section 17(5)(d) with effect from 1 July 2017, and added an Explanation deeming the section to have always read that way, overriding any judgment, order or decree to the contrary. The Court dismissed the department’s review petition in May 2025, but by then Parliament had already legislated the point away.

The practical position for a property today: if you claimed construction credit on the strength of that judgment, the statute is now against you on its face and you should expect the question in audit. The retrospective override is itself being challenged as a matter of constitutional validity, so keep the original working papers and the basis on which the credit was taken. Do not, however, budget on the judgment surviving.

Section 17(5): the food and beverage block

This is the provision that catches almost everybody, and it works differently from the rate condition above.

Section 17(5)(b)(i) blocks input tax credit on food and beverages and outdoor catering. It is a block on the recipient, not a condition on the supplier, and it applies regardless of what rate the restaurant charged. There are only three ways out:

• Same-category outward supply. You bought the food to make an onward taxable supply of food. This is the exception a hotel restaurant lives on, and the reason a caterer can claim credit on ingredients while your office cannot claim credit on the team lunch.
• Element of a composite or mixed supply that is itself taxable.
• Obligatory under a law in force. Where a statute compels the employer to provide it — a factory canteen mandated under labour law is the standard example. Note the word obligatory. A generous staff canteen policy is not a legal obligation, and voluntary provision does not qualify.

Two related blocks worth knowing while you are here. Section 17(5)(b)(iii) blocks travel benefits extended to employees on vacation, such as leave or home travel concession — note it targets vacation travel, not ordinary business travel. And 17(5)(g) blocks goods or services used for personal consumption, which is where a poorly documented “client entertainment” claim usually ends up.

Can your business claim GST on a hotel bill?

Now the other side of the counter, and the answer that surprises people.

Hotel accommodation

Accommodation is not blocked by section 17(5). If your staff stayed on business, the expense is in the course or furtherance of business and section 16 is satisfied. So far so good.

What stops you is elsewhere. Under section 12(3)(b) of the IGST Act, the place of supply for lodging is where the property is located — not where you are. So a hotel in Mumbai billing your Delhi-registered company treats it as an intra-state supply of Maharashtra and charges CGST plus Maharashtra SGST. You have no Maharashtra registration, so there is no ledger for that credit to land in. It is unusable.

• Same state as your registration — claimable, subject to the usual conditions.
• Different state — not claimable. The hotel is right to charge CGST and SGST; you are simply not the person who can use it.
• You hold a registration in that state — claimable there, provided the invoice carries that GSTIN. This is the only real lever, and it means telling the hotel the correct GSTIN at check-in, not arguing after the folio is issued.

A hotel cannot fix this by charging IGST instead. The place-of-supply rule is not optional, and an invoice raised the wrong way creates a problem for the hotel rather than a credit for you.

Restaurant and food bills

Simpler and less welcome: blocked. Section 17(5)(b)(i) covers food and beverages whether the restaurant charged 5% or 18%, whether it is standalone or inside a five-star hotel, and whether it appears on a separate bill or as a line on the room folio. Unless you are in the business of supplying food yourself, or a statute obliges you to provide it, that tax is a cost.

Which produces the odd result in the table above: a restaurant in specified premises charges you 18% and takes full credit on its own kitchen inputs, while you write off the whole 18%.

What to do with it

Book the blocked and unusable tax to expense in the period, and make sure your accounting system does not park it in a GST receivable that nobody ever clears. Credit sitting in your books that was never claimable in your returns is precisely the difference that surfaces at year end, and an excess in 3B over 2B is what triggers a DRC-01C intimation with a seven-day clock on it.

Rules 42 and 43: one property, two rates

Most real hotels are not on one rate. A single property can run 5% rooms, 18% rooms, a 5% restaurant, an 18% restaurant in specified premises, a banquet operation and a spa. Credit on shared inputs cannot simply be claimed in full.

• Rule 42 apportions credit on inputs and input services between taxable and exempt or non-creditable use. For this purpose, supplies where the rate is conditional on credit not being taken behave as non-creditable turnover for the related inputs.
• Rule 43 does the same for capital goods, spread over sixty months. A chiller, a laundry plant or a lift serving the whole property has to be apportioned, not claimed outright.
• The annual true-up matters. Both rules require a reconciliation of the provisional monthly apportionment against actual turnover for the year, with any shortfall paid with interest. Doing this once at year end is where most properties discover the number is wrong.

Directly attributable inputs should be tagged as such at source — kitchen purchases to the restaurant, room amenities to accommodation — so that only genuinely common costs go through the formula. Every rupee correctly attributed is a rupee that does not get diluted by apportionment.

Specified premises: the declaration that changes everything

Whether your restaurant charges 5% without credit or 18% with credit turns on whether the property is specified premises. Since April 2025 that is decided two ways:

• By fact. The premises is specified if, in the preceding financial year, the value of supply of any unit of accommodation exceeded Rs 7,500 per unit per day. One suite above the line for one night in the whole year is enough.
• By choice. A supplier can opt in by declaration even without crossing the threshold, moving the food and beverage operation to 18% with credit.

The mechanism is now online. GSTN enabled electronic filing of the opt-in declarations by advisory in January 2026: Annexure VII for existing registrants and Annexure VIII for new applicants, under Notification 05/2025-Central Tax (Rate). The timing is unforgiving — existing taxpayers file between 1 January and 31 March of the preceding financial year, and new applicants within 15 days of ARN generation. Miss the window and you are on the default treatment for a full year.

This is worth an actual calculation rather than a default. A property with a large banquet and restaurant operation and heavy kitchen and equipment purchases can be materially better off opting in, taking 18% with full credit, than sitting at 5% and writing off its input chain. A room-led property with modest food revenue usually is not. And the by fact limb is the one that catches people: a hotel that quietly crossed Rs 7,500 on a single peak night last year is specified premises this year whether it noticed or not, and its restaurant rate should have changed with it. That mismatch is a standard finding in a departmental audit.

Where the money actually is

Across hospitality files, the recurring recoveries and exposures sit in a short list:

• Out-of-state hotel credit wrongly claimed by the buyer. Almost universal, and the easiest to find. One filter on the travel ledger.
• The 5% band accepted without modelling the forfeited input chain against the rate saved.
• Rule 42/43 apportionment never trued up at year end, accruing interest.
• Restaurant rate not re-set after the property became specified premises by fact.
• Food credit claimed on staff and client meals with no statutory obligation behind it.
• Fit-out credit abandoned along with genuinely blocked construction credit, because nobody separated the two.
• Wrong GSTIN on the folio where the company does hold a registration in that state, turning a claimable credit into a dead one for want of a check-in instruction.

Every one of these is found by reconciliation, not by argument. Which is the same discipline that keeps your 2B and 3B in agreement month to month.

The bottom line

Input tax credit in hospitality is not one question, it is two, and they are answered by different sections. If you run the property, the number that matters is the credit you forfeit to sit at 5%, and whether your Rule 42/43 apportionment has ever been trued up. If you buy from one, the number that matters is how much out-of-state hotel credit you have been claiming that was never available, and how much blocked food credit is sitting in a receivable nobody clears. Both are found the same way — by reconciling what the invoice says against what the law actually allows — and both are far cheaper to find yourself than to have found for you.