India's GST Reforms and the Emerging Growth Potential in the Budget Hospitality Sector

India’s Goods and Services Tax (GST) reforms, effective September 22, 2025, have recalibrated the fiscal landscape for the budget hospitality sector, particularly mid-market hotels and travel tech platforms. By reducing the tax rate on hotel rooms priced up to ₹7,500 per night from 12% to 5%, the government has directly lowered costs for domestic travelers, a move expected to stimulate demand and occupancy rates [1]. This strategic adjustment aligns with India’s broader economic goals of boosting domestic consumption and tourism, especially ahead of the festive season, a critical period for travel activity [5].

Mid-Market Hotels: A Tax-Driven Tailwind

The revised GST structure has created a clear competitive advantage for mid-market hotels. According to a report by JLL, the Indian hospitality sector’s Revenue per Available Room (RevPAR) grew 12.9% year-on-year in Q2 2025, driven by sustained occupancy improvements and reduced tax burdens [2]. The 5% GST rate on budget accommodations is projected to make these hotels 7–10% cheaper for consumers, incentivizing leisure and business travel [2]. This affordability is particularly significant for India’s price-sensitive domestic market, where over 80% of travelers prioritize cost efficiency [1].

However, the removal of Input Tax Credit (ITC) for mid-market hotels introduces a critical caveat. Operators can no longer reclaim taxes on inputs like linens, toiletries, and software subscriptions, eroding profit margins by an estimated 2–3% [4]. This creates a competitive imbalance with luxury hotels, which retain full ITC benefits, and could deter investment in mid-market expansion unless operators offset costs through operational efficiencies [4].

Travel Tech Platforms: Navigating Compliance and Opportunity

Travel tech platforms, including online aggregators (OTAs), stand to benefit from increased demand for budget accommodations. The GST simplification to a two-tier system (5% and 18%) has reduced compliance burdens for startups, enabling them to streamline pricing and improve user experience [3]. For instance, the reduction in GST on economy-class flights from 12% to 5% is expected to drive air travel demand, indirectly boosting OTA bookings [1].

Yet, the lack of ITC for mid-market hotels may indirectly pressure travel platforms. As hoteliers pass on higher operational costs to consumers, platforms could face margin compression or pricing wars to retain market share [4]. Despite this, the broader economic environment post-GST 2.0 is investor-friendly. A $1 billion alliance between U.S. and Indian venture capital firms, announced in late 2025, underscores growing confidence in India’s tech ecosystem, including travel tech [5].

Investment Thesis: Balancing Risks and Rewards

The GST reforms present a compelling case for strategic investment in mid-market hotels and travel tech. For hotels, the key lies in leveraging lower tax rates to capture market share during peak travel seasons. Operators that optimize costs—through automation, bulk procurement, or partnerships with travel platforms—can mitigate ITC-related losses. For example, Lemon Tree Hotels and Chalet Hotels have already seen stock price surges of up to 50% in FY26, driven by expansion plans and debt reduction [2].

Travel tech platforms, meanwhile, must capitalize on the surge in domestic tourism. Startups with AI-driven pricing models or integrated booking ecosystems are well-positioned to thrive in this environment. The government’s emphasis on digital infrastructure, including AI-powered tax compliance tools, further reduces operational friction for these firms [4].

Challenges and Mitigation Strategies

The primary risk for investors remains the ITC imbalance. To address this, policymakers could reintroduce partial ITC for mid-market hotels or extend tax breaks to offset input costs. In the interim, investors should prioritize firms with strong balance sheets and scalable cost structures.

For travel tech, regulatory clarity on GST compliance for digital services will be critical. Platforms that diversify into ancillary services—such as travel insurance or loyalty programs—can insulate themselves from pricing pressures in the core booking segment.

Conclusion

India’s GST reforms have catalyzed a structural shift in the budget hospitality sector, creating a fertile ground for mid-market hotels and travel tech platforms. While challenges like ITC removal persist, the combination of lower consumer prices, seasonal demand spikes, and a supportive policy environment positions the sector for sustained growth. Investors who adopt a long-term, value-driven approach—focusing on operational efficiency and digital integration—stand to reap significant returns as India’s domestic tourism boom accelerates.

Source:
[1] GST reform to boost budget hotel bookings in India,
https://www.hotelmanagement-network.com/news/gst-reform-to-boost-budget-hotel-bookings-in-india/
[2] Indian hospitality sector's revenue per available room
https://m.economictimes.com/industry/services/hotels-/-restaurants/indian-hospitality-sectors-revenue-per-available-room-jumps-12-9-in-april-june-report/articleshow/123525444.cms
[3] How India's Next-Generation GST Reforms Will Supercharge the Startup Ecosystem
https://urbanchronicle.in/2025/09/03/how-indias-next-generation-gst-reforms-will-supercharge-the-startup-ecosystem/
[4] Hotels welcome GST cut but were hoping for more, some ...
https://www.moneycontrol.com/news/travel/hotels-welcome-gst-cut-but-were-hoping-for-more-some-worry-about-impact-on-profits-13520408.html
[5] New $1 billion alliance formed to strengthen US-India deep tech ties
https://m.economictimes.com/tech/startups/n