Budget 2007-08: Hotels

Budget Measures

Provision for building tourist infrastructure has been proposed to increase from Rs 4.2 bn in 2006-07 to Rs 5.2 bn in 2007-08.

20,000 more hotel rooms are required for the Commonwealth Games. To cater to the demand for rooms, - year holiday from income tax for 2, 3 and 4 star hotels as well as for convention centres with a seating capacity of not less than 3,000 has been proposed. They should be completed and begin operations in the National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during the period April 1, 2007 to March 31, 2010 to avail the tax holiday.

Venture capital funds that invest in hotel-cum-convention centres of a certain description and size will enjoy a pass through status.

Higher investments have been made to develop roads and infrastructure facilities.

Dividend distribution tax has been increased from 12.5% to 15% on dividends distributed by companies

Additional 1% higher education cess is to be implemented.

The dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds increased to 25% for all investors.

Budget Impact

The 5-year tax holiday will give a boost to the hotel majors to set up hotels to cater to the additional demand.

With India catching the attention of the world as a major business and tourist destination, the move to give a pass through effect to the venture capital funds will increase the investments in the hotel industry.

Measures taken on the infrastructure front will indirectly improve the prospects of the Indian hospitality sector.

The impact of higher tax (cess) on the industry is likely to lower net margins, albeit marginally.

Sector Outlook

The outlook for the sector looks positive. The Indian hotel industry witnessed strong average room rates and occupancy rates in the year 2006. With new room capacity, the companies will be able to cater to the strong inflow of tourists. Also venture capital funds are a useful source of risk capital, especially for start-up ventures.

Company Impact

Players like Indian Hotels, ITC, EIH , Leela will benefit as they will get access to funds for their expansion.

Indian Hotels and ITC are expanding in areas around Delhi. They will get the benefit of the tax holiday.

Industry Wish List

The hotel industry should be treated at par with other infrastructure sectors such as roads, ports and telecommunications and granted full tax benefits under Section 80-IA of the Income Tax Act.

Private sector participation needed to upgrade infrastructure in several identified tourist circuits.

India requires about 60,000 hotel rooms, in addition to the existing stock of accommodation, in the next three to four years to cater to 5 m tourists expected to visit the country annually by that time. Considering that this additional creation of room capacity would involve an investment of Rs 20 bn, adequate incentives should be made available to the industry.

Plans need to be made to set up tourism training academies over the next one year to meet the rising need for hospitality manpower.

Domestic tourism is under served and should be given more importance by the government.

The industry is also seeking rollback of the depreciation rate for hotel buildings to 20%, which was reduced to 10% in 2003. Given the nature of the business and the fact that hotel buildings have to be renovated, refurbished and refurnished on a continuous basis, these buildings should be treated differently from other buildings.

Increased stress on proper infrastructure development is needed

Budget over the years

Apart from the emphasis on developing the road infrastructure in the country, the FM announced a higher FDI limit in sectors like telecommunication, civil aviation and insurance.

Service tax rate increased from 8% to 10%. Service tax being imposed on business exhibition services, airport services and travel agents.

Corporate tax reduced to 30% from the present level of 35%, with an increase in surcharge to 10%.

Industry not granted "Infrastructure" status, as demanded by players.

Significant thrust on Infrastructure building and road development. An outlay for National Highway development increased from Rs 65 bn in 2004-05 to Rs 93 bn in 2005-06. Government proposed to establish an SPV to finance infrastructure projects in specified sectors like roads, ports, airports and tourism, which could draw upon the country's foreign exchange resources for financing necessary imports. The cumulative borrowing limit for 2005-06 was set at Rs 100 bn.

The National Urban Renewal Mission was designed to upgrade urban infrastructure. It covered seven mega cities, with a population of over a million, and some other towns. An outlay of Rs 55bn has been made in 2005-06, including a grant component of Rs16.5 bn for the Mission. Projects such as The Mumbai Metro Rail Project, the Mumbai Trans Harbour Link, the Mumbai Western Expressway Sealink and the Bangalore Metro Rail Project to be funded through this mission. Steps to be taken to make Mumbai a regional financial center.

Plan allocation has been increased from Rs 7.8 bn to Rs.8.3 bn for the tourism sector.

The FM had announced the development of 15 tourist destinations and circuits.

Also, 50 villages with core competency in handicrafts, handlooms and culture, close to existing destinations and circuits will be identified and developed.

Service tax rate increased from 10% to 12%.

Reduction in peak customs duty.

India as a tourist destination:  Though India accounts for a fraction of global tourist flows currently, the country is expected to increase its market share over the long-term. The recognition of tourism as an industry in the recent past has paved the way for opening up to competition. This, we believe, is likely to shape the industry fortunes for the better.

Infrastructure development:  The road development project along with other aspects like airport modernisation and port development is likely to result in increased economic activity. With air tariffs also falling steeply owing to increased competition, the tourism sector is expected to witness increased inflow of foreign tourists, high inbound tourist flow and development of new tourist destinations within the country.

Increased competition:  In the hotel sector, a number of multinationals have entered/strengthened their presence in the country. Players like Four Seasons are also likely to enter the Indian market in the future. Besides, Indian hotel chains are also expected to expand international presence going forward. A combination of all these factors could result in a strong emergence of budget hotels, which could potentially lower the cost of travel and related costs.

Slow in implementation:  As has been the case before, lack of adequate recognition for the industry despite being one the biggest generator of employment (direct and indirect) has been hampering growth prospects. Infrastructure development, though happening, continues to languish. Amidst improving fundamentals, India could lose out to other countries if the pace is not accelerated.

Regional hubs developing:  As mentioned above, though India has the potential, in the tourism sector, competition is more global. The rapid growth of China, select South East Asian countries, the pace of development in the Middle East could affect India, in terms of its ability to attract tourists into the country.

Susceptible to geo-political events:  Since tourism is a global phenomenon, any adverse developments on the geo-political front are likely to impact global tourist flows. India is no exception to the same, as was evident during events like September 11, Iraq war and SARS.