Following the Supreme Court’s ban on the sale of alcohol on highways, high GST rates have come as a double whammy.
What is the issue?
Generating over $200 billion in revenues and employing over 40 million people in 2016, the travel and tourism industry contributed almost 10 % to India’s GDP.
‘Make in India’ and the provision for e-visas were steps in the right direction for promoting the tourism industry in India.
But recent events, such as liquor ban on highways and some provisions in the GST suggest the hospitality business has been extended a second-fiddle treatment.
Hotel projects tend to be highly capital intensive, require a long gestation period and are frequently plagued by tribulations such as a very high cost of borrowing, relatively short repayment schedules as well as a maze of licenses, permits.
Hotel performances are instantly impacted by changing socio-economic and political factors and the business is inherently cyclical from a performance stand-point.
The recent liquor sale ban by the Supreme Court on all national and state highways, however well-intended, has ended up impacting free-standing restaurants and hotels as well.
The impact of this is not limited to loss of revenue by way of liquor sales.
It has caused a ripple effect on consumer choices from a lodging standpoint — the primary generator of revenue for hotels.
It’s a case of the presence of alcohol not necessarily aiding revenue enhancement, but its absence almost certainly harming the ability to attract guests.
Hotel owners now must contend with an unforeseen environment that has made an immediate and significant impact on their ability to earn revenue
It will not be surprising to see more NPAs in the months ahead.
What is the issue with GST?
Under GST hotels with a realised rate of Rs5,000 and above shall be required to levy 28 % GST on the bill.
The argument is that this level of spend points to ‘luxury’.
The hotel sector was traditionally marred with a variety of taxes and these varied from State to State.
Luxury tax ranged from zero % in certain parts of the nation to 20 % of published tariff in others.
If one were to put aside other costs (such as service charge, municipal tax, cess etc.), not a single state was levying such a high tax on its guests as will now be the case with this new tax regime.
What are the flaws in taxation?
The basic premise of creating slabs for hotels (No tax below Rs1,000, 12 % GST between Rs1,001 and Rs2,500 and 18 % GST between Rs2,501 and Rs5,000) is flawed. India has about 120,000 organised, branded hotel rooms.
About 65 % of this inventory averaged a realised room rate of Rs5,000 or more in 2016.
Essentially, two-thirds of the branded supply in India is now left with no option but to brace itself for tough times ahead.
Hotels may be forced to reduce their room rates in a bid to woo guests, who will most certainly not be keen on paying an extra 10 % to 16 % tax on their room rate.
The Government’s inability to view the hotel sector as a provider of infrastructure rather a source of luxury is at the root of the issue.
Over 70 % of hotel accommodation is presently consumed by corporate or business travellers. Hotel rooms are thus a “need” and not a “luxury”.
