Booking a ~5,000-plus hotel room? Be ready to pay more

Staying in luxury hotels with tariffs above ~5,000 will cost you more as the service tax under the new GST regime has been set at 28 per cent. Experts consider this a regressive move, especially at a time when occupancy levels in metros and tier-II cities are on the upswing.

On an average, effective tax rate on hotels in Maharashtra are between 19 per cent and 20.5 per cent. This subsumes nine per cent service tax and 10 per cent luxury tax for hotels in general and 10.5 per cent service tax and 10 per cent luxury tax for hotels with banquet facilities. “A difference of 800-900 basis points in tax level is demoralising,” said Achin Khanna, tax expert at consulting firm HVS.

Under the new regime, hotels will fall under tax slabs on tariff basis and not by category. In tier-II cities, hotels that do not comply to 5-star classification also charge high tariffs. “Slabs are by rate and not star classification. Even so, ~5,000 does not mean luxury. Levying 28 per cent is unfair,” Khanna said. A way for the hoteliers is to keep their tariffs below ~5,000, where they can be taxed at 18 per cent. However, they will be raising additional revenue by levying surplus charges such as parking charge and room service charge.

Taxpayers and customers are the ones who will bear the cost. Moreover, such a move is also a deterrent for hotel owners who were planning to expand after increase in occupancy level in FY16; investments in leisure markets will be the hardest hit, say experts.

The restaurants in luxury hotels will also fall under the same tax slab, which makes even dining out expensive. “Consumption pattern of restaurants in luxury hotels falling under the new tax regime may change, customers may choose to stay in luxury hotels but may dine outside where they can save on their additional expenses that increases due to rise in tax,” said Suresh Nair, tax expert, E&Y. There is also confusion about the tax slab of restaurants that are in hotels offering tariffs between ~2,500 and ~5,000 and also above ~5,000.

Where luxury hotels are worse affected by the move, budget hotels have a reason to cheer. Hotels with tariffs between ~2,500 and ~5,000 will fall under the 18 per cent tax slab and those with tariffs between ~1,000 and ~2,500 will be charged at 12 per cent. Ritesh Agarwal, founder & CEO, OYO rooms said, “We welcome this step by the government. A lower tax rate for budget hotels will ensure that the industry's quality upgrade continues while delivering standardised accommodation to millions of middle-class travellers. Hotels are the single-biggest contributor to the tourism industry, which accounts for 7.5 per cent of the GDP. The move will boost revenue from the travel and tourism sector, going ahead.”

Sharat Dhall, COO, Yatra.com, said, “Overall this seems like a good move for the sector and should help the growth momentum continue. Budget hotels for the aam aadmi have been kept insulated from any increases in tariffs, while the luxury segment might see an increase due to the GST rates announced.”

Amidst divergent taxes for luxury and budget hotels, the real good news is for small hotels with tariffs below ~1,000, which have been exempted.

The real good news is for small hotels with tariffs below ~1,000, which have been exempted