FM's tax menu upsets hoteliers

REALTY & HOTELS: Finance minister brings hotel accommodation under service tax net

Get ready to shell out more for your hotel accommodation. With the finance minister bringing hotel accommodation under the service tax net, unhappy hoteliers say room rents will go up which may impact demand.

“I am not happy with this measure. While the industry has still not recovered from the slowdown, there is an additional tax burden now. Hotels are not consumer durable products whose demand goes up with growing population. It’s a business with risks and suffers various shocks. Expanding the tax net every year is an absolute negative measure,” said Patu Keswani, chairman and managing director of the Lemon Tree Hotels chain, which is spread across the country.

After the economic slowdown and the Mumbai terror attack in end-2008, the domestic hotel industry saw a nationwide decline in occupancy during 2008-09.

The market, however, witnessed a revival in the latter half of 2009-10 with a year-on-year rate correction of 16 per cent across all star categories in the major markets of the country.

The finance minister has levied a service tax of 10 per cent on hotel accommodation in excess of a declared tariff of Rs 1,000 a day, while giving an abatement of 50 per cent on the tariff. This implies if the hotel bill is around Rs 1,000, one will be charged a service tax of Rs 50 on the same. This, excluding an education cess of 0.3 per cent.

Also, as a Budget measure, air-conditioned restaurants, which have the licence to serve liquor, will increase their charges on the services they provide.

So, if the liquor bill amounts to Rs 100, one would pay a total of Rs 103. The extra charges being paid by the customers go towards service tax.

“Introduction of taxes in this piecemeal manner goes against the basic grain of tax policies. You are picking on services availed of by the affluent class. How much can you tax an industry (hotel) which is already burdened with taxes — luxury, service and value added tax between 30 and 40 per cent? This will lead to manipulation in tariffs,” said Atul Gupta, senior director, Deloitte India.

According to ITC CEO Rakesh Mathur, “The hotel industry is seen as a cash cow and rather than encouraging the industry to grow, time and again we are taxed. We have been trying to fight luxury tax but to no avail. Our airfares are already going through the roof. India as a tourism destination is becoming more and more difficult. This measure will not only impact the domestic tourism industry but also international.”

Domestic demand for hotels in India has been higher than demand from international travellers. According to a recent report by HVS International, a consulting, valuation and research firm, though a large portion of domestic demand comes from commercial activities, an increasing number of Indians are taking annual holidays both within the country and overseas.

In 2009, the domestic market recorded 650 million travellers as compared to only five million international tourists.