Over the years, hospitality has evolved from a business activity into a formidable industry contributing to our nation’s mainstream economy via valuable foreign exchange, statutory taxes and employment generation.

No tax has impacted the hospitality industry in recent times as much as the GST as it is levied on room revenue, F&B and ancillary income like spa, pastry shop & outdoor catering

It is a key pillar of the burgeoning tourism sector providing accommodation to more than a billion travel frequencies annually. Hence, the Union Government has to change its outlook towards the hospitality industry and view it through the lens of an employment engine and significant contributor to nation’s GDP. Studies show that the employment multiplier effect of each room added is 2.5x directly and 10x indirectly. In a country facing massive unemployment, this is not a metric anyone can ignore. With the Ministry of Tourism (MoT) itself projecting a shortfall of 3,00,000 rooms to effectively address the targeted footfalls, there is huge scope to expand the accommodations sector.

No tax has impacted the hospitality industry in recent times as much as the GST as it is levied on room revenue, F&B and ancillary income like spa, pastry shop and outdoor catering. At a macro level, GST has been good and comes with many benefits. As a hospitality industry professional and entrepreneur, I welcome the single point tax coming in place of luxury, entertainment and service taxes. But we should all agree that there is so much more room left for improvement. The Government would be well advised to seek genuine feedback from stakeholders like investors and entrepreneurs, corporate customers, vendors servicing the tourism industry and the tour operators.

Non-availability of ITC (Input Tax Credit) on capital investment for construction of hotels is a major deterrent for welcoming new investments in the sector. However, ITC on capital goods is available now under GST, which was not there in the erstwhile ST regime.
The increased cost of compliance and non-compliance risk are quite unsettling for the hospitality industry depending on a large unorganised sector and multiple small-scale vendors for procurement needs.

Raw materials like MFP (meat, fish, poultry), dairy products, fruits, vegetables, cereals, pulses, spices and charcoal are all mostly supplied by the unorganised sector. While the GST will ensure better compliance and widen the tax base, during the interim period, which looks like forever, operating businesses have been dealt with a very raw hand due to the non-budgeted spike in cost and ambiguity around the implementation. While the earlier VAT regime allowed removal of tax in case of bad debts, GST offers no such relief too.

The fact that electricity, diesel and gas, which incur major expenses for the hospitality industry, are still covered by VAT denies the industry the benefits of ITC for a lion’s share of operating expenses. Besides, the liquor sales in a hotel, a key revenue earner which is still under VAT, add to compliance complexity.

GST of 18 per cent on staff food (if hotel room tariff is Rs. 7500 and above) and GST on staff facilities are detrimental to the basic idea of staff welfare. Remember, hotels usually provide staff with food on duty, free of cost.

Corporate business has been severely affected by GST. Intra-state passing of GST is a major issue impacting MICE business. Inter-state tour operators are unable to avail ITC on CGST and SGST charged by hotels leading to higher quotes. Non-availability of ITC on food for corporate guests though service has been availed for business development is another downside.
Luxury and premium hotels are already a troubled segment.

In an earlier article, I had highlighted how there are today more than 200 stressed hotel assets in India of which about 80 per cent are in the luxury/premium category. 28 per cent GST on room rates above Rs. 7500 is detrimental for these hotels. With the kind of investment that has gone into building these hotels, no investor would have ever imagined that this level of ‘penalty’ tax would ever be levied on them. GST at current rate will fatally handicap the already burdened luxury and premium properties built at high cost and struggling to come out of recession. There is an immediate need to raise the room tariff band to Rs. 12,000 for the 28 per cent GST slab or rationalise the GST on room tariff between 12-15 per cent.

The current GST rates slapped on the hospitality industry, be it on room tariff or F&B, make us the costliest amongst ASEAN and GCC destinations. This neutralises the earnest steps taken by MoT, which is marketing ‘Incredible India’ globally to bring in 30 million FTAs. Since the Middle East and South East Asian nations have compelling attractions and experiences, and world-class infrastructure on offer at highly competitive prices, travel decision makers would weigh the pros and cons, which could rule out India as a competitive destination.

The decision of the GST Council in July to levy tax on transaction value of hotel rooms instead of published rates has brought huge relief to hoteliers who have been protesting the confounding taxation since its implementation. This has now allowed tour operators to price holiday packages attractively, especially, during off seasons and also for groups when hotels extend very competitive rates that are far lower than their published tariff.

I believe GST has served to widen the tax net, making it more of a level playing field. The composite scheme extended to small businesses avoids the need for tax auditing totally. This is very helpful for the more than 1 lakh small hotels in India. Assessment will be easy once both parties – clients and vendors – come online. Assessment will now get over in the same Financial Year (FY) rendering FY and Assessment Year (AY) one and the same.

Let us hope the Union Government will hear our desperate pleas and once and for all address the anomalies in the implementation of GST in order to allow this sector to prosper.
Addressing demands on a frequent and piecemeal basis is not permitting this dynamic industry to settle down and focus on its core business outcomes – earn income for the government and generate employment for its people.

The author is a hospitality industry veteran with over four decades of standing having served in various senior leadership roles with the Taj Group of Hotels. He is the founder director of Turnstone Hospitality LLP.

Categories: Opinions

Leave a Reply

Your email address will not be published.