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Hotel sector: The need of the hour

Jun 17, 2009

With the new government in power, the hotel industry is hoping for some respite considering the tough scenario that the sector has been facing. Some issues are on the regulatory front, which if resolved will be beneficial for the hotel industry's long term growth. Non industry status: The hotel sector is highly capital intensive with a large amount of fixed expenses. The sector has been demanding an industry status for a long time now. Though the seventh five-year plan (1985-1989) had proposed that tourism be conferred the 'industry' status, the decision and implementation was left to the states. Granting this status would have entitled tourism to secure several benefits in terms of financing, tax exemption and subsidised power tariffs among others. However, considering the loss of revenues (as industry status entitles to many concessions) only a few states have granted the 'industry' status to tourism. Thus on account of the reluctance of states, hotel players continue to pay 30 to 50% higher power tariffs as most states have commercial tariffs for power usage in hotels. Also, hotels are clubbed along with real estate business as speculative, thereby not entitling it to priority lending by banks. This in turn makes it difficult for the hotel players to borrow long term funds at cheaper rates. This affects their expansion plans.

Average Cost of Debt
Country %
US 7.5
France 6.3
China 7.0
Thailand 7.3
UAE 8.3
Germany 6.5
Spain 6.5
India 14.0
Source :HVS International

In recent times, the government has taken some measures which will benefit the sector.

  • In 2008-09, Rs 5.2 bn for development of tourism infrastructure was allocated. This figure is higher by Rs 970 m as compared to the previous year. However, it is only 1% of the total government spending.

  • RBI has allowed ECB upto US$ 100 m in January 2009. This would help in raising funds.

The industry, hence, is hoping that considering the recent troubled times, the government would grant the status. This would enable hotels to access cheaper debt from international markets and also provide tax concession (VAT/sales taxes, property tax). Also, industrial rates on consumables like electricity and water amongst others would be applicable.

Infrastructure: Infrastructure plays a very important role for the tourism sector. Development of airports, railways, roadways, better connectivity between places and facilities and upkeep of places of tourist interest is very necessary. However, not much has been done on this front. India needs to invest US$ 320 bn just to overcome infrastructure bottlenecks. While projects worth US$ 350 bn are in the pipeline, slow execution and corruption has hampered the progress.

Tax: Hotel industry also faces issues on the tax factor. Being a state subject, luxury taxes vary as per the state law. Also, different taxes apply to different categories of hotels within the same state. Globally, a unified tax structure is followed. high tax is charged on F&B too and variations exist between the rates among the states (VAT, sales tax).

Difference in taxes
  Standard luxury tax Effective tax rate
Andhra Pradesh 5 8.3
Gujarat 6 10
Delhi 12.5 20.8
Karnataka 12 20
Maharastra 10 10
Kerala 15 15
Rajasthan 10 10
Goa 10 10
Tamil Nadu 12.6 20.8
Source : HVS

Tax benefit for 5-star properties: The Union budget of 2007-08 provided a five-year tax holiday for two-star, three-star and four-star hotels and convention centres in Delhi, Faridabad, Gurgaon, Noida and Ghaziabad. However, this was not extended to the five-star establishments in and around the capital to expedite hotel room construction before the 2010 Delhi Commonwealth Games. With bulk of the tourist staying in 5 star hotels, the concession is needed for the development of this segment.

Approvals: Setting up a hotel is not an easy task. One is required to fulfill a slew of formalities. The hotels have to apply for multiple licenses and approvals through multiple government agencies. In many states, rules are fluid and are open to loose interpretations. Further, lack of transparency and presence of bureaucracy pushes the project schedule back by 6-12 months. This makes it detrimental for new hotel development.

Going forward
The hotel industry is expected to have a tough FY10. As per WTTC, the travel GDP is expected to decline by 3.5%. The hotel players may witness a RevPAR fall of 10% to 15% during the year.

In India, the economic slowdown and the terrorist attack in Mumbai have played havoc to both business and leisure travel in 2009. CRISIL Research expects the profitability of premium hotels to be impacted due to a sharp decline in occupancy rates and room rates. It expects demand to decline by 15.5% YoY in 2009-10. This is going to affect the profitability of the sector. The hotel companies are already facing cash flow pressure, thereby affecting their expansion plans. The balance sheets of the hotel companies are under stress on account of acquisitions of land banks and rising debt levels.

While the government is promoting year 2009 as 'Visit India', concrete measures on problems faced by the sector need to be solved urgently to get the industry back on track.

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