In a country which believes that a guest must be treated like a god, its hospitality business is so burdened by taxes that it robs the sector of its generosity.
INCREDIBLE INDIA needs incredible reforms, especially in the hospitality sector. The hospitality sector is not just about hotels, it encompasses a wide variety of activities within the service sector. It has created millions of new jobs, directly as well as indirectly, benefiting millions of workers in dozens of allied industries. Tourism is also a huge source of foreign exchange for the country. The Indian service sector of which hospitality is a major component has also been the most vibrant contributor to the nation’s Gross Domestic Product (GDP). The sector also attracts the highest Foreign Direct Investment (FDI) and is the most important net foreign exchange earner for the country.
However the Indian hospitality sector is one of the most heavily taxed industries which reduces its competitiveness vis-à-vis other destinations in the world. Customers are taken a back every time they pay a hotel bill, compounded as it is by multiple taxes. At present, the hospitality sector is burdened with taxes like VAT, service tax, luxury tax, entertainment tax, state excise and others which put together range between 20 and 30 per cent. For certain services, total of taxes goes beyond 30% as well. This multiple taxation either adds to the operational costs thereby reducing profitability or has to be passed on to the consumer. While the much-awaited GST regime is expected to rationalise the taxation structure, leaving alcohol and entertainment tax outside the GST purview will lead to a significant amount of tax cascading resulting in increased costs to the industry. Hotels and restaurants will be the worst affected in terms of administrative complexities and will face hardship on account of compliance costs and disputes. Also, the tax rate for the sector needs to be lowered from the proposed 18 per cent slab under consideration in the new GST guidelines.
Apart from above, the government needs to come up with specific policies aimed at providing incentives to fuel growth in this sector. The industry is hugely capital intensive and has a long gestation period. Hence it needs special tax reforms to attract fresh investments. This could be by way of providing investment linked incentives, doing away with the applicability of the Maximum Alternate Tax (MAT) for hospitality sector, providing for minimal withholding tax regime on long term borrowings from foreign countries, additional depreciation on new investments and tax incentives on foreign exchange earnings among others.
Infrastructure development is the backbone and key to the growth of the hospitality sector. Taxes on the hospitality sector must be lowered to boost investments as there is an acute shortage of good quality accommodation in the country. It has been noticed that there is an inconsistency in classification of hospitality sector. This being a highly capital intensive sector, providing infrastructure status to the hospitality sector will go a long way in attracting investment and consequently its development
The industry is also burdened with the need for multiple licenses, clearances, NOCs and permissions. The number of licenses required is huge and from multiple authorities which discourage and delays any new project. The norms for different licenses also vary or are contradictory from place to place, making the process quite daunting. Licensing norms are obsolete, leading to lots of harassment and delays. Therefore, a single window clearance for real estate projects along with an infrastructure status for the hospitality industry are much-needed steps for its growth.
With a projected growth of 7.2 per cent per annum in direct contribution to the GDP until 2025 and a GDP contribution of US$ 160.2 billion by 2026, the hospitality sector has the potential to be the main driving force behind the economy in the years to come. That, however, will be possible only with the right amount of support and incentives from the government.