ADelhi government notice in the papers on Thursday reminded all hotels, clubs and guest houses to register and pay the mandated luxury tax. That’s a normal move to improve tax collections. What is a bit odd is that the official definition of luxury seems to be static for more than a decade.
Delhi introduced a 10% luxury tax in 1996 on hotels, et al., that charged Rs500 per day or more for a room. Six years later the rate was raised to 12.5%, while the threshold of Rs500 still continues. Surely, the small matter of inflation over the decade implies Rs500 will no longer rent us a luxury room as it did in 1996! Delhi seems to be more unrealistic than even Haryana or Madhya Pradesh. The former plans to levy the tax only on tariffs above Rs2,000. The latter is more progressive and taxes at a far lower rate of 5% up till Rs1,000. Taxing luxury can be a response to income distortions, but not adapting the concept of luxury with economic realities is a distortion in itself.