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Hotels: The ‘Tax’ effect - Views on News from Equitymaster
 
 
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  • Mar 5, 2003

    Hotels: The ‘Tax’ effect

    Although the union budget 2004 was tagged as a ‘populist’ one, there were some reforms made by the Finance Minister, which have been a positive for some of the key sectors. For instance the hospitality sector, the FM made a few proposals for this sector, which would certainly help the growth and development of the sector.

    The FM stated that expenditure tax would be removed from hotels whose room rates are higher than Rs 3,000 per day. This gets translated into lower room rates, which ultimately benefits the customer who had to shell out the extra 10% surcharge under expenditure tax. This move would help increase the number of tourists, although not directly. Expectations are that lower tariffs would attract more tourists and therefore, would be an increase in the occupancy levels.

    The finance minister during the budget also proposed that state governments do away with the luxury tax. The states are however, not bound to take action on the same. Added to this, the hotels are still not part of the service industries that are taxed. Overall, the hotel industry has been exempted from the levy of this tax, but service tax is only imposed in case of conferences where meals are not served.

    Another significant development for this sector could be giving the tourism sector infrastructure status. The finance minister proposed that Financial Institutions, which have infrastructure capital fund, would get the incentives under section 10 (23G) for lending to hotels. The hotel industry will now be able to approach infrastructure development funds for loans. The loans are cheaper compared to loans given out for other sections of the industry. Thus, giving a thrust to the investments in the industry.

    What does the customer get from this? For a customer who is ready to pay a premium to stay in a 5 star hotel this reduction in the room tariffs would not make a huge difference and secondly, if one looks at the significance of expenditure and service tax as a percentage of total taxes then the relevance seems to be quite insignificant.

    However, increased investments into the sector on the back of cheaper cost of capital are likely to increase supply and therefore, drive down tariffs. The tourists could benefit from an increased capacity in the industry. It would help the tourist who would get better rates, as the market becomes highly competitive and defragmented.

     

     

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