Hotels Industry
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Withdrawal of tax benefits for earnings in foreign exchange under Section 80 HHD of the Income Tax Act.
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Under Section 80HHD of the Income Tax Act, 1961, 50% of the profits attributable to the foreign exchange earnings of hotel companies were directly exempt from tax and the other 50%, if reinvested in the hotel industry were also exempt from taxation. 60%-80% of hotel companies earnings are in foreign exchange and they have been availing tax benefits under this section. Hence they have been paying an effective tax rate of between 14% -20% till now.
As this withdrawal is applicable to hotels, 20% of its foreign exchange income in FY01 would be taxed. Going forward each year the taxable income of hotel companies would increase and in five years time the entire foreign exchange earnings would be taxed. This will adversely impact the earnings of hotel companies.
The companies which would be negatively effected in this sector are Hotel Leelaventure, Asian Hotels, Indian Hotels, EIH Ltd, ITC Hotels, Oriental Hotels and Bharat Hotels. There has been no respite for the hotel sector which has been going through a tough period over the last few years with a fall in occupancy rates and pressure on average room rates. The withdrawal of tax sops will add to these woes.
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Rationalisation of the existing tax structure to do away with the multiplicity of taxes amongst the state and central governments. As taxes paid by tourists in India is around 30%, one of the highest in the world, reduction of both luxury and expenditure taxes are high priority on the industry's wish list.
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Exemption of service tax for the hotel and restaurant industry. As service tax was originally for the unorganised sector who were not paying any taxes on their transactions, however now hotels and restaurants are paying service tax.
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Hotel industry should get infrastructure status. This is needed to increase the current room supply scenario India and encourage new investments.
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The large forex income generated by the hotel and tourism industry, is currently exempt from taxation under section 80 HHD. The government has recognised the industry as an export industry and has given benefits for EPCG imports and the tax benefits continue. However the remaining incentives given to exporters have not been extended as yet to the hotel and tourism industry.
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Occupancy rates in the metro cities should start picking up in the near future due to improvement in the economy and more stable political condition. Tourist arrivals to India grew by 5% in 1999.
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Rupee depreciation continues to add to the earnings of hotels.
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Foreign exchange earnings of hotel companies are exempt from taxation. Under Sec.80 HHD, 50% of the foreign exchange earnings of a hotel company are totally exempt from taxation and the other 50% if re-invested in the hotel industry for future capital expansions are also exempt from taxation.
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The high level of expenditure tax and luxury tax charged by the government in hotels in India. This has been a deterrent to foreign tourist arrivals as they have to pay an additional 30-40% on their total bills as taxes.
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Poor land reforms in India have kept land prices artificially high. This has made the capital cost of hotel projects especially in the larger cities very costly.
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Tourist arrivals continue to grow very slowly due to lack of infrastructure facilities and a lack of safety measures. The government's efforts of promoting India as a tourist destination have not been very successful.
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