The proposal in the Union Budget 2011 to introduce a Service Tax of 5% on room charges for hotels charging more than Rs.1000/- would indeed be a retrograde step and would keep foreign tourists away from India, felt representatives of Indian hospitality industry. The union budget for 2011-12 has levied service tax on hotels with declared tariff of Rs 1000 a day and above with an abatement of 50%, so the effective tax burden is 5%.
Besides, it has levied service tax on air-conditioned restaurants that have license to serve liquor with an abatement of 70% thus reducing the overall burden to 3%. According to Vivek Nair, chairperson, World Tourism and Travel Council India Initiative (WTTCII) and the vice chairman and managing director, Hotel Leelaventure Ltd, as it is, the state governments levied a luxury tax on room charges which is as high as 12.5% in States like Kerala and Goa. The proposal to impose the service tax on the room charges would amount to a multiplicity of taxes on the same base amount.
Thus, in Kerala and Goa, the total amount of tax on the room charges would amount to 17.5% which, in comparison with other competing tourism destinations like Singapore, Malaysia and Indonesia - which levy only 3% - amounts to nearly six times the tax.
Currently, India gets only six million foreign tourists, whereas China notches about 15 million and Malaysia, Thailand and Indonesia also have substantial Foreign Tourist arrivals (FTAs). ”The proposal to levy a Service Tax of 5% on room charges would drive foreign tourists away from India at a time when the tourism industry is just picking up after the economic slowdown and terrorist attacks in Mumbai. Already, about 15 million domestic tourists leave India for foreign destinations every year and with this additional tax burden, the hotel room rates in India would go up and thus, would further encourage Indians to go to foreign destinations,” Nair added.
Rating agency CARE said in a statement that the impact on restaurants seems marginally negative considering that the effective burden is low and the service tax can be passed on to the consumers due to the resilient nature of the industry.
”These changes may not impact the profitability of these companies as the hotel industry is comparatively resilient and such taxes are passed on to customers. Levy of service tax on room rent and restaurant services will lead to increased costs for the customer,” CARE said in a statement.