RESEARCH IT  >>  INDIAN ECONOMY  >>  BUDGET 2002

Hotels Industry

  Budget Measures

  • Reduction of dividend tax from 20% to 10%.

  • There are no specific recommendations for the hotel sector in this budget. However as this budget has encouraged the growth of infrastructure namely ports, roads and airports, this improvement in infrastructure will positively impact the hotel and tourism industry.

      Budget Impact

  • The positive impact on infrastructure development will lead to the growth of the tourism industry in the long term.

  • There are no changes for the hotel sector directly this time round. However last years budget had proposed withdrawal of tax benefits for earnings in foreign exchange under Section 80 HHD of the Income Tax Act. 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 2001.

  • As this withdrawal is applicable to hotels, 20% of its foreign exchange income in FY02 onwards 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.

  • As the above has already been discounted we do not expect this to have a negative impact on hotel companies.

  • The reduction in dividend tax will benefit the industry majors, to a marginal extent. On the whole the budget is more or less neutral for the hotel sector.

    Company Dividend (Rs) Dividend tax Savings Addition to EPS Current EPS New EPS % addition to EPS
    FY02   22% 11%          
    Indian Hotels 8.5 84 42 42 0.9 32.4 33.3 2.9%
    EIH 5.0 58 29 29 0.6 24.4 25.0 2.3%

       Industry wish list
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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 are around 30%, one of the highest in the world, reduction of both luxury and expenditure taxes are high priorities on the industry's wish list.

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    Exemption of service tax for the hotel and restaurant industry. The service tax was originally for the unorganised sector who were not paying any taxes on their transactions, now however 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 in this sector.

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    Hotel industry should get industry status to avail of the benefits available under this. Currently the hotel sector is unable to carry forward and set off accumulated loss and unabsorbed depreciation allowance in amalgamations and demerger. This is available currently for industrial undertakings implying only manufacturing units currently.

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    Under section 80HHD the foreign exchange earnings reserve of hotel companies is currently permitted to be utilised in a prescribed manner. The industry wants flexibility in utilising this reserve for normal hotel operations.

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    Tax benefits are permitted currently for hotels located in hilly and rural areas. The industry is keen that these benefits are extended to hotels located in metro cities too.

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    There is no uniformity on collection of luxury taxes across states. The industry is hopeful that telephone charges, health club and laundry charges should be exempt from luxury tax and luxury tax should be charged uniformly on actual negotiated/ discounted rates instead of the published rack rates.

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    Foreign exchange payments should be excluded from expenditure tax.

     
       Key Positives
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    Occupancy rates and average room rates in the metro cities have picked up during the current financial year due to an improvement in the economy and a stable political scenario. Tourist arrivals to India have grown by 9% from April-October 2000.

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    The depreciating rupee continues to add to the earnings of hotel companies as 60% of industry earnings are in foreign exchange.

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    Many foreign hotel chains are opening up hotels in India via joint ventures and equity investment mode. This shows that the Indian hotel industry has arrived on the global map. The long term potential for tourism in India is the reason for this.

    		  
       Key Negatives
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    The high level of expenditure tax and luxury tax 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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    Foreign exchange earnings of hotel companies are no longer exempt from taxation. In the last budget it was announced that hotel companies will start paying taxes in a phased manner starting FY2002.

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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 safety measures. The government's efforts of promoting India as a tourist destination have not been very successful.

  • How was this sector impacted by Budget 2001?