Do Hotels Have to Reverse ITC Because Room GST Dropped From 12% to 5%?
GSTZone Desk · Updated 2026
Short answer
Yes, in principle — since rooms priced up to ₹7,500 per day now fall into a 5% GST bracket without input tax credit (down from the earlier 12% with ITC), any ITC on inputs and capital goods attributable to that now-lower, no-credit room revenue generally has to be reversed, following the same logic that applies whenever a supply moves from a taxable-with-credit rate to a no-credit rate.
In detail
This follows a familiar pattern in GST: when the output rate for a category of supply changes such that ITC is no longer available on it, credit already claimed or held against that supply needs a corresponding reversal — the same principle that applies when a business shifts into composition or starts making exempt supplies.
For hotels, the room-tariff-linked rate reform meant a genuine shift: rooms that used to be taxed at 12% with full ITC, and are now taxed at 5% without ITC (for the sub-₹7,500 bracket), effectively moved from a credit-eligible category to a credit-ineligible one. Any accumulated or ongoing ITC tied specifically to that room revenue has to be worked out and reversed as part of the transition.
This doesn’t mean hotels lose ALL their ITC going forward — rooms and services falling into the 18%-with-ITC ‘specified premises’ bracket continue to generate creditable ITC as before; it’s specifically the portion tied to the now-5%-no-ITC room revenue that needs the reversal treatment.
GSTZone tip
If you run a hotel spanning both rate brackets (some rooms above ₹7,500, some below), work through this as a proper apportionment exercise similar to Rule 42/43 for mixed taxable-exempt supplies, rather than a one-time blanket reversal — the two categories need separate ITC tracking going forward.
Related questions
Does this reversal apply only to input services, or capital goods too?+
Both, in principle — capital goods like furniture, fixtures, and equipment used for room service would need a proportionate reversal calculation similar to how Rule 43 handles capital goods used partly for exempt supplies.
Is there a specific transitional relief mechanism for this reversal?+
This is exactly the kind of transitional detail worth confirming with a GST professional against the specific transition notification/circular for the September 2025 reform, since one-time rate-change transitions sometimes come with their own specific working mechanism rather than the general rule alone.
Want the law itself?
Go deeper on GST Rates
This page answers one question. Our GST Knowledge Hub carries every section and rule behind it — the exact legal text, what it means in plain English, and how it has been amended. Free, no login.
Need this sorted for your specific case?
Every business’s facts are a little different. Talk to a GSTZone expert — we’ll tell you exactly where you stand, and handle the filing if you need it.
Or call +91 97554 06939 · WhatsApp us