If you run a small hotel or homestay, you have almost certainly heard of the GST composition scheme from a chartered accountant, a fellow host, or a WhatsApp forward promising “flat 1% tax, no headache.” The pitch is simple: pay a small fixed percentage of turnover, skip the monthly filing grind, and stop worrying about input tax credit calculations. For a trader selling goods out of a small shop, that pitch is often true. For a hotel or homestay taking room bookings, the real answer to “can I use the GST composition scheme” is more layered than most of that WhatsApp advice lets on, and getting it wrong can mean a notice from the department months after you have already filed a year of returns under the wrong scheme. This guide walks through what the GST composition scheme actually allows for hospitality businesses in India, where it genuinely applies, where it does not, and what a realistic decision looks like for a property your size.
What the GST Composition Scheme Actually Is
The GST composition scheme is an optional, simplified way of paying GST that trades a lower headline tax rate for giving up input tax credit and a few other rights that regular taxpayers have. Instead of charging GST on every invoice at the rate that applies to your supply (5 percent, 12 percent, 18 percent and so on) and separately claiming credit for the GST you paid on your own purchases, a composition taxpayer pays a single, low, fixed percentage of turnover directly to the government, files far fewer returns, and cannot pass GST on to the customer as a separate line item. The scheme was designed for very small businesses, mostly goods traders and manufacturers, who found the regular monthly return cycle and input tax credit paperwork disproportionate to the size of their operation.
Two separate legal provisions create two different versions of this scheme, and the difference between them matters a great deal for a hospitality business. The first is the original composition scheme under Section 10(1) of the CGST Act, built for goods suppliers, with one specific carve-out added later for restaurant services. The second is a newer, separate scheme under Section 10(2A), introduced from 1 April 2019, that opened composition-style taxation to service providers in general, at a different rate and a much lower turnover ceiling. A hotel or homestay needs to understand both, because room revenue and restaurant revenue are treated differently under each.
Do You Even Need to Think About This Yet?
The composition scheme question only matters once you are required to register for GST in the first place, and a genuinely small operation may not be there yet. A supplier of services, which is what hotel accommodation and homestay bookings legally are, generally needs to register for GST once aggregate turnover crosses 20 lakh rupees in a financial year, with a lower threshold notified for a handful of special category states, so always confirm the current figure for your specific state before assuming the general limit applies. Below that line, you are not required to register, cannot charge GST, and the composition scheme, which is only ever a choice available to a registered person, simply does not apply to you yet. Many single-room homestays genuinely sit below this line for their first year or two of operation. Once you cross it and take GST registration, that is the point at which the composition-versus-regular-GST decision covered in this guide actually becomes relevant.
The Two Composition Options a Hospitality Business Could Consider
Section 10(1) is the scheme most people mean when they say “composition scheme” in ordinary conversation. It is available to a registered person whose aggregate turnover in the previous financial year did not exceed 1.5 crore rupees, though the limit drops to 75 lakh rupees for the northeastern special category states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand) and Himachal Pradesh. Under this scheme, a manufacturer or trader of goods pays a flat 1 percent of turnover (0.5 percent CGST plus 0.5 percent SGST), and a restaurant service that does not serve alcohol pays a flat 5 percent (2.5 percent CGST plus 2.5 percent SGST). This is the crucial detail for a hospitality business: Section 10(1) only extends to restaurant services. Hotel accommodation itself, classified under SAC 9963, is a service other than restaurant service, and the original composition scheme was never written to cover it, regardless of how small your turnover is. A homestay that runs entirely on room bookings, with no attached restaurant, simply cannot opt into Section 10(1) at all.
Section 10(2A) is the newer, less well known option, and it is the one that can technically apply to a hotel or homestay’s room revenue. It allows a registered person providing services (any services, not just restaurant services) to opt for a flat rate of 6 percent (3 percent CGST plus 3 percent SGST) if their aggregate turnover in the preceding financial year did not exceed 50 lakh rupees. On paper, nothing in this provision names hotel accommodation as excluded. A homestay owner whose full-year revenue genuinely stayed under 50 lakh rupees could, in principle, opt for Section 10(2A) on their room income. The catch, covered in detail below, is that this ceiling is low enough, and the general exclusions from any composition scheme are broad enough, that very few real properties can actually use it once you look closely.
Why Most Hotels Cannot Actually Use Either Scheme
The GST composition scheme sounds attractive on paper for a hospitality business, and then falls apart against three practical realities almost every property runs into.
The first is the turnover ceiling itself. Fifty lakh rupees a year works out to roughly 13,700 rupees a day in average revenue, spread across every day of the year including your low season. A single-room homestay renting out one unit at a modest rate might stay under that line. A property with three or four rooms running at even a moderate occupancy, or any property in a market where the average nightly rate is above a few thousand rupees, will cross 50 lakh rupees well before the year is out. Once your turnover for the current year exceeds the threshold, you are required to exit the scheme from the date you cross it, not from the start of the next year, which means switching your billing and return-filing mid-year.
The second, and the one most WhatsApp advice misses entirely, is the exclusion for supplies made through an electronic commerce operator that is required to collect tax at source under Section 52 of the CGST Act. Nearly every major OTA (online travel agency) and hotel-booking marketplace operating in India today falls into this category. If any meaningful share of your bookings comes in through such a platform rather than directly from the guest, that alone disqualifies you from the composition scheme entirely, on any part of your turnover, regardless of how small your total revenue is. A homestay that lists on even one OTA marketplace, alongside taking direct bookings, has already stepped outside composition eligibility for as long as that listing is active.
The third is that the composition scheme’s turnover threshold is computed on your aggregate turnover for the whole business, calculated against your PAN, not property by property or revenue-stream by revenue-stream. If you own two small guesthouses under the same PAN, or run one property with both room revenue and a modest attached restaurant, the 50 lakh rupee (or 1.5 crore rupee, for the restaurant-only Section 10(1) scheme) ceiling applies to the combined turnover of everything under that PAN, not to each activity separately. A host who assumes they can “compose” just their smaller revenue stream while running a larger, regular-GST business alongside it under the same PAN is working from a misunderstanding that a GST notice will eventually correct.
The Narrow Case Where the Composition Scheme Genuinely Works
None of this means the scheme is useless for hospitality, only that it fits a specific, small profile. The realistic candidate for Section 10(2A) is a very small, single-property homestay or guesthouse that takes bookings directly, by phone, WhatsApp or walk-in, does not list on any OTA or aggregator marketplace, does not supply rooms to guests in another state as a matter of routine business structure, and whose total annual revenue genuinely sits below 50 lakh rupees with room to spare. For a host in exactly that position, opting into the GST composition scheme for hotels trades a flat 6 percent tax on turnover, no input tax credit, and a much lighter filing calendar (a quarterly payment via Form CMP-08 and one annual return, Form GSTR-4, instead of monthly or quarterly regular filings) for simplicity. If your guests are mostly leisure travellers who do not need a GST-compliant tax invoice for their own business claims, and you would rather spend an afternoon a year on GST paperwork than a few hours every month, that trade genuinely makes sense.
It is worth being honest about how narrow this window is. The moment you add a second room’s worth of steady bookings, sign up with even one OTA to fill off-season gaps, or start hosting corporate travellers who ask for a proper tax invoice, the calculation above stops holding. Many hosts who could technically use Section 10(2A) in their first year of operation outgrow it within eighteen months, and the administrative cost of switching schemes mid-year (raising fresh regular-rate invoices, filing a transition return, and separately working out input tax credit on stock and capital goods you were not claiming credit on before) is real. Treat composition eligibility as something to check every year against your actual, current booking mix, not a one-time decision.
What You Give Up by Opting Into the GST Composition Scheme
Choosing the composition scheme for hotels is not a pure discount, it is a trade, and a host should weigh the full list of what changes before opting in.
You cannot claim input tax credit on anything, not on the furniture and linen you bought for the rooms, not on the commission or software subscriptions you pay for, not on the GST charged on your electricity or LPG connection where applicable. Every rupee of GST you pay on business purchases becomes a straight cost with no offset.
You cannot issue a tax invoice. A composition taxpayer issues a “bill of supply” instead, which cannot show GST as a separate line item, because you are not permitted to collect GST from the customer on top of your room rate under this scheme. This matters most for corporate guests or travel desks who need a proper tax invoice to claim their own input tax credit on business travel. A composition-scheme property is, in practice, closed off to that segment of demand.
You cannot make any inter-state outward supply. For most single-location hospitality businesses this is a non-issue in the way it would be for a trader shipping goods across state lines, but it does mean you cannot structure your business to sell services (packages, event hosting, anything billed as a supply) to a customer located in another state and remain eligible.
You cannot list or transact through any electronic commerce operator required to collect tax at source under Section 52, as covered above, and this is usually the exclusion that actually rules a growing hospitality business out, well before the turnover ceiling does.
You must display “composition taxable person” on every bill of supply and at a prominent place at your place of business, so the guest and any visiting tax officer can see your registration status at a glance. This is a small administrative point, but missing it is a common, easily avoidable compliance slip.
The Restaurant and Food Service Angle
A homestay or small hotel with an attached restaurant or breakfast service that bills food separately from the room stay has a genuinely different set of options, because restaurant service (not serving alcohol) is the one non-goods activity that Section 10(1) does cover, at the 5 percent composition rate, against the same 1.5 crore rupee turnover ceiling (75 lakh rupees for the northeastern special category states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand, and for Himachal Pradesh). In principle, a property whose restaurant is a genuinely separate, separately billed activity, and whose combined aggregate turnover across the whole PAN stays under that ceiling, could opt into the restaurant composition rate for the food and beverage side of the business.
Two things make this narrower in practice than it first appears. First, as covered above, the 1.5 crore rupee ceiling applies to your combined turnover under that PAN, room revenue included, not to restaurant revenue alone, so a hotel with meaningful room revenue is very unlikely to qualify even if the restaurant itself is small. Second, if the room side of the business is not itself composition-eligible (which, per Section 10(1), it never is on its own), you end up running one part of the business under composition and the rest under regular GST, which is legally possible in some structures but adds a layer of separate billing, separate GST treatment, and separate return tracking that a small property’s back office is rarely set up to handle cleanly. For most hotels and homestays with an attached restaurant, the practical answer is to run the whole business under regular GST, charging the correct rate for rooms and for food separately, rather than trying to carve out just the food and beverage revenue for composition treatment.
Composition Scheme vs Regular GST vs the QRMP Scheme
Composition is not the only way to reduce the filing burden of regular GST. The Quarterly Return Monthly Payment scheme, usually called QRMP, lets a regular taxpayer with turnover up to 5 crore rupees file GSTR-1 and GSTR-3B quarterly instead of monthly, while still paying tax roughly monthly and keeping full input tax credit and the ability to issue proper tax invoices. For a hotel or homestay that has outgrown composition eligibility, or was never eligible because of OTA listings, QRMP is usually the more realistic way to cut down on paperwork without giving up input tax credit or the ability to sell through booking platforms.
No input tax credit, no tax invoices, no OTA or inter-state bookings, turnover capped at 50 lakh rupees. Quarterly payment, one annual return.
Full input tax credit, tax invoices and OTA bookings allowed, turnover up to 5 crore rupees. Quarterly returns, roughly monthly tax payment.
Full input tax credit above the 7,500 rupee tariff threshold, no turnover cap, monthly GSTR-1 and GSTR-3B.
How to Opt In and Opt Out
A registered person opts into either composition scheme by filing Form CMP-02 on the GST portal, and this election generally has to be made at the start of a financial year, applying from the first day of that year, rather than mid-year on demand (a person newly registering for GST can opt in from the date of registration itself, using Form GST REG-01 or CMP-02 as applicable). Once opted in, the choice generally continues year to year until you either voluntarily opt out (Form CMP-04) or become disqualified, most commonly by crossing the relevant turnover ceiling or by starting a supply that falls under one of the exclusions covered above, such as listing on an OTA marketplace.
Exiting the scheme, whether voluntary or forced by a disqualifying event, requires filing an intimation and switching your invoicing over to regular GST rates from the date of exit. You also become entitled, for the first time, to claim input tax credit on your existing stock, capital goods and input services as of the day before you exit, by filing Form ITC-01 within thirty days. This is a genuinely useful provision if you are transitioning out of composition because your business has grown rather than shrunk, since it lets you claim back credit on assets you already own rather than losing that value entirely.
Common Mistakes Hosts Make With the Composition Scheme
The single most common mistake is assuming eligibility based on last month’s revenue rather than the full preceding financial year’s aggregate turnover across the whole PAN, then getting an unpleasant surprise when a CA reviews the annual numbers. The second is not accounting for a single OTA listing as a disqualifying factor, on the assumption that “most of my bookings are direct” is good enough, when the rule is about whether any supply goes through a Section 52 e-commerce operator, not what share of revenue does. The third is issuing what is effectively a tax invoice, showing GST as a separate line item, while registered under composition, which is not permitted and can attract penalties on top of the tax difference. The fourth is forgetting to display the required “composition taxable person” notice at the property and on every bill of supply, a small compliance detail that is nonetheless checked during a GST audit. The fifth, and most costly, is failing to track the turnover threshold in real time during a strong season and continuing to bill under composition rates for weeks after crossing 50 lakh rupees, which creates a retrospective tax shortfall that has to be corrected with interest.
Records to Keep Either Way
Whether you end up on composition or regular GST, keep a running, dated log of your booking source for every reservation, direct or through an OTA, from the day you take GST registration. This single habit answers the question that actually decides composition eligibility (are any of your supplies going through a Section 52 e-commerce operator) without having to reconstruct a year of booking history from memory when your CA asks at filing time. Keep this alongside your monthly or quarterly turnover total, tracked cumulatively against the 50 lakh rupee (or 1.5 crore rupee, for the restaurant-only route) ceiling, so you notice the month you cross it rather than discovering it months later during annual reconciliation. A simple spreadsheet with one row per booking, a source column, and a running turnover total is enough for a small property, and it is the same record a GST officer will ask to see first in the event of an audit or a mismatch notice.
Two Realistic Scenarios
A two-room homestay in Coorg takes all of its bookings directly, through a phone number in its Google Business listing and a WhatsApp number shared by past guests. It does not list on any OTA marketplace. Its total revenue for the last financial year was 34 lakh rupees. The owner opts into Section 10(2A), pays a flat 6 percent on turnover each quarter through Form CMP-08, and files one annual GSTR-4. She loses the ability to claim input tax credit on the new mattresses and water heater she bought this year, and she cannot issue a tax invoice to the one corporate guest who asked for one, but her total GST compliance workload for the year is a single afternoon with her CA rather than a monthly filing habit, and her total tax outgo at 34 lakh rupees of turnover is lower than the GST she would otherwise have charged and passed through at the regular rate. For her specific, small, direct-booking-only business, the trade works.
An eight-room boutique property near Udaipur fills roughly 60 percent of its rooms through direct bookings and 40 percent through two OTA listings that it keeps active specifically to smooth out its off-season occupancy. Its average room rate puts its annual turnover well above 50 lakh rupees even before counting the OTA-sourced bookings, and the OTA listings alone would disqualify it from composition regardless of turnover. The property registers under regular GST, opts into the QRMP scheme to file quarterly instead of monthly, charges 5 percent GST on rooms under 7,500 rupees a night and 18 percent with input tax credit on its handful of premium rooms above that tariff, and claims input tax credit on its renovation costs, linen, and software subscriptions. For a property this size with any OTA presence at all, this was never a genuine choice between composition and regular GST, it was a choice between regular GST filed monthly or the same regular rates filed quarterly under QRMP.
Working Out Whether Composition Actually Saves You Money
The honest way to check whether the GST composition scheme would save your specific property money is to compare two numbers side by side for a full year: your total GST liability under composition (a flat 6 percent, or 5 percent if the supply genuinely qualifies as restaurant service under Section 10(1), applied to your full turnover, with zero input tax credit), against your net GST liability under the regular scheme (the GST you would charge at 5 percent or 18 percent depending on tariff, minus the input tax credit you would actually claim on your purchases). For a property with low input costs relative to revenue, mostly labour and utilities rather than large equipment or renovation spend, composition’s lack of input tax credit stings less, because there was not much credit to claim in the first place. For a property mid-renovation, or one that regularly buys furniture, linen, kitchen equipment or software subscriptions with meaningful GST components, the lost input tax credit under composition often outweighs the lower headline rate. Run this comparison against your own numbers before assuming the lower percentage automatically means a lower tax bill, since for many properties it does not.
Composition Scheme Fit, by Property Type
A single-room or two-room homestay taking only direct bookings is the profile the Section 10(2A) composition scheme actually fits. If that describes your property and your turnover has room to spare below 50 lakh rupees, it is genuinely worth asking your CA to run the numbers rather than dismissing it out of hand.
A budget hotel with five to ten rooms almost always sits in the uncomfortable middle: turnover close to or above the 50 lakh rupee ceiling even without any OTA listings, and most such properties do carry at least one OTA listing to manage occupancy during weekday or off-season stretches. For this profile, regular GST under the QRMP scheme is usually the realistic answer, not composition.
A boutique or business hotel with any rooms tariffed above 7,500 rupees a night was never a composition candidate to begin with, both because turnover at that price point clears 50 lakh rupees very quickly and because corporate and business travellers in this segment routinely need a proper tax invoice, which a composition-scheme property cannot issue.
A serviced apartment or long-stay property, where guests often stay 30 days or more, sits in a different category altogether for GST purposes, since long-term accommodation arrangements can attract different treatment from nightly-tariff hotel bookings. If your property runs a mix of short nightly stays and month-plus stays, get this looked at specifically rather than assuming one GST treatment covers both.
A Worked Example
Consider a three-room guesthouse with an average nightly rate of 3,200 rupees and 55 percent annual occupancy, taking bookings only directly. Annual room revenue works out to roughly 19.3 lakh rupees, comfortably under both the GST registration threshold most states use and the 50 lakh rupee composition ceiling, so this property may not even need to register for GST yet, and the composition question does not arise until it does. Now scale the same guesthouse up to six rooms at the same rate and occupancy: annual revenue climbs to roughly 38.5 lakh rupees, past the registration threshold and requiring GST registration, but still under the 50 lakh rupee composition ceiling, making Section 10(2A) worth evaluating provided there are still no OTA listings in the booking mix. Add a seventh and eighth room, or push occupancy to 65 percent, and the same property crosses 50 lakh rupees, at which point composition eligibility ends and regular GST, most likely under QRMP, becomes the only realistic option regardless of whether an OTA is involved at all.
How OpenStays Fits In
OpenStays does not file your GST returns and is not a substitute for a chartered accountant, and this page is not the place to make that claim. What OpenStays does help with directly is the part of this decision that is actually within a host’s control: how many of your bookings come in through OTA marketplaces versus your own direct channels. OpenStays’ 0 percent commission direct booking engine and WhatsApp conversational AI are built to help a small property take more of its bookings directly, by phone, WhatsApp and its own booking page, rather than relying on OTA listings to fill rooms. For a host weighing whether they can realistically stay eligible for the GST composition scheme, reducing dependence on OTA marketplaces is not just a commission-saving move, it is also what keeps the Section 52 e-commerce exclusion from disqualifying you in the first place. OpenStays’ invoicing tools also make it straightforward to issue the correct bill of supply or tax invoice depending on which scheme you are registered under, so switching between composition and regular GST as your business grows does not mean rebuilding your billing process from scratch.
Frequently Asked Questions
Can a small hotel use the GST composition scheme?
Only under Section 10(2A), the service-provider composition scheme, and only if annual turnover across the whole PAN stayed under 50 lakh rupees in the preceding year, no supply is made through an OTA or similar e-commerce operator required to collect tax at source, and no supply crosses state lines. Hotel room revenue does not qualify under the older, more commonly discussed Section 10(1) composition scheme at all.
What is the GST composition scheme rate for hotels?
Six percent (3 percent CGST plus 3 percent SGST) under Section 10(2A) for room revenue, if eligible. Restaurant or food service billed separately can qualify for the 5 percent Section 10(1) restaurant composition rate, subject to the same combined-turnover ceiling.
Why can’t a hotel use the regular composition scheme that shopkeepers use?
The original composition scheme under Section 10(1) was built for suppliers of goods, with one specific extension for restaurant services. Hotel accommodation is a service other than restaurant service, so it was never covered by Section 10(1), independent of turnover.
Does listing on an OTA disqualify a property from the GST composition scheme?
Yes. Any supply made through an electronic commerce operator required to collect tax at source under Section 52 of the CGST Act is excluded from composition eligibility, regardless of what share of total revenue that listing represents.
What is the turnover limit for the GST composition scheme for hotels?
Fifty lakh rupees in aggregate turnover for the preceding financial year, under Section 10(2A), calculated across the whole PAN, not per property or per revenue stream.
Can a hotel claim input tax credit under the composition scheme?
No. A composition taxpayer, under either Section 10(1) or Section 10(2A), cannot claim input tax credit on any purchase, and cannot show GST as a separate line item to the customer.
What return does a composition taxpayer file instead of GSTR-1 and GSTR-3B?
A quarterly statement-cum-payment in Form CMP-08, and one consolidated annual return, Form GSTR-4, instead of the monthly (or QRMP quarterly) GSTR-1 and GSTR-3B filings a regular taxpayer files.
Can a composition-scheme hotel issue a GST tax invoice to a corporate guest?
No. A composition taxpayer issues a bill of supply, not a tax invoice, and cannot charge GST separately. This effectively rules out corporate guests who need a tax invoice to claim their own input tax credit.
What happens if a composition-scheme property’s turnover crosses 50 lakh rupees mid-year?
Eligibility ends from the date the threshold is crossed, not from the start of the next financial year. The property must switch to regular GST billing from that date and can claim input tax credit on existing stock and capital goods by filing Form ITC-01 within thirty days of the switch.
Can a hotel with an attached restaurant use composition just for the restaurant?
In principle the restaurant portion, billed separately, can qualify for the 5 percent Section 10(1) restaurant composition rate, but the 1.5 crore rupee eligibility ceiling is calculated on the combined turnover of the whole business under that PAN, room revenue included, which rules this out for most properties with meaningful room income.
Is the QRMP scheme the same as the composition scheme?
No. QRMP lets a regular GST taxpayer with turnover up to 5 crore rupees file returns quarterly instead of monthly while still charging regular GST rates, keeping full input tax credit, and being able to list on OTA platforms. Composition replaces regular rates entirely with a flat percentage and removes input tax credit.
Do special category states get a different composition threshold for hotels?
The 75 lakh rupee threshold for special category states applies to the Section 10(1) goods and restaurant composition scheme, not to the Section 10(2A) service-provider scheme relevant to hotel rooms, which uses a flat 50 lakh rupee ceiling nationwide.
Can a homestay opt into composition partway through the year?
Generally no. The election is made at the start of a financial year using Form CMP-02 and applies from the first day of that year, except for a business newly taking GST registration, which can opt in from its date of registration.
Does opting for composition affect how OpenStays or an OTA calculates commission?
No, commission and GST registration type are separate. What composition eligibility does affect is whether you can list on an OTA marketplace at all, since any such listing is itself a disqualifying factor for the scheme, independent of commission terms.
In Summary
The GST composition scheme for hotels is real, but it is a narrow tool for a narrow situation: a very small, direct-booking-only property with turnover comfortably under 50 lakh rupees, no OTA listings, and guests who do not need a formal tax invoice. Most hotels and homestays with any meaningful scale, any OTA presence, or any corporate clientele will find themselves better served by regular GST, most likely under the QRMP scheme to keep the filing calendar light while retaining input tax credit and the ability to sell through every channel available to them. Check your actual, current-year numbers and booking mix against the specific exclusions covered here before assuming either way, and revisit the question every year rather than treating it as a one-time decision made at registration.
This article is for general information and is not legal or tax advice. GST rates, thresholds and composition scheme rules are set by the CGST Act, associated rules and periodic government notifications, and can change. Verify current thresholds, rates and forms with a qualified chartered accountant or the GST portal before making a registration decision for your property.