INDIAN HOTEL INDUSTRY

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subrata@icraindia.com Pavethra Ponniah +91 44 4596 4314 pavethrap@icraindia.

1 ICRA RESEARCH SERVICES Corporate Ratings ` INDIAN HOTEL INDUSTRY Impact of Goods & Services Tax (GST) on The Hotel Industry IMPACT ANALYSIS Contacts: Subrata Ray subrata@icraindia.com Pavethra Ponniah pavethrap@icraindia.com Shreekiran Rao shreekiran.rao@icraindia.com Jaganathan A jaganathan.a@icraindia.com August 2016

2 Banquets to become cheaper; impact on room revenues and restaurants largely neutral ICRA expects GST to be neutral to marginally positive for the Indian hotel industry, depending on the state and Service provided Room Revenue: Benefits depend on location Room revenues attract luxury taxes and service tax. Luxury tax, being a state subject is imposed by each State under different methods and rates. As seen from Exhibit 1 and 2, impact of GST on each State could vary depending on their effective luxury tax rates. For states which compute luxury tax on rack rates (Exhibit 1) and those with high luxury tax rates (Exhibit 2: Kerala), effect of GST is positive, while for states like Maharashtra (Exhibit 2) with relatively low luxury tax rates (on actual tariffs) GST impact is neutral. However, the major benefit under GST comes from the seamless input-tax credit (on services and local taxes) which will lower the overall cost for hotels. Exhibit 1: Indirect taxes pertaining to the Hotel Industry On Rack rate Tamil Nadu Rate Amount in Rs. Rack rate - 7,000 Actual rate paid [A] - 5,500 Luxury Tax [i] 12.5% 875* Service Tax [ii] 9.0%@ 495# Total taxes [B=i+ii] 24.9% 1,370 Gross bill payable [A+B] 6,870 GST #18% Reduction under GST 7% Source: ICRA research; * Luxury tax computed on rack rates; # service tax on actual includes 40% abatement Other similar States include Delhi, Gujarat, Andhra Pradesh Exhibit 3: Indirect taxes pertaining to the F&B segment Tamil Nadu/Kerala Maharashtra/Delhi Rate Amount in Rs. Rate Amount in Rs. Food & beverage bill[a] VAT [i] 14.5% % 106 Service Tax[ii] 6.0% % 51 Total taxes[b=i+ii] 20.5% % 157 Gross bill payable[a+b] 1,024 1,007 GST #18% Reduction under GST 1.5% 0.5% Source: ICRA research# indicative rate Exhibit 2: Indirect taxes pertaining to the Hotel Industry On Actual rate Maharashtra Kerala Rate Amount in Rs. Rate Amount in Rs. Rack rate Not Applicable Not Applicable Actual rate paid [A] 5,500 5,500 Luxury Tax [i] 10.0% % 688 Service Tax[ii] 9.0% % 495 Total taxes[b=i+ii] 19.0% 1, % 1,183 Gross bill payable[a+b] 6,545 6,683 GST #18% #18% Reduction under GST 1% 3.5% Source: ICRA research Restaurants: Largely neutral The introduction of GST will have a neutral to marginally positive impact on the restaurant business depending on the individual state s current VAT rates (Exhibit 3). The high abatement rates on service tax for F&B (60%) as compared to room accommodation (40%) lowers the effective tax rate for F&B to 18.5%-20.5%. Here again, apart from the direct impact, restaurants will also be able to utilise input-tax credit on F&B, unlike the current situation where abatement restricts the availment of input credits. Central excise duty is currently exempt for food preparations served inside the premises, however levied on prepared and sold bakery items (@6.18%) and chocolates (@12.36%). This will also be subsumed into GST. Alcohol is expected to be outside the perview of GST and taxed at higher sin-tax rates. These rates will also vary from state to state. Page 2

3 Banquets to get cheaper Banqueting will be the major gainer under GST as the service tax on banquets is high at 10.5% (30% abatement). Including VAT, effective tax increases to ~ %. Further, with some states levying luxury tax on part of the banquet bill (hire charges), the effective tax could increase to ~35.0% depending on the type of event/state. Hence, GST at a lower rate of % will be a shot in the arm for this segment. Please note: apart from the final GST rate, further clarity is awaited on implementation process, and on: [A] subsuming of luxury taxes into GST [B] continuation of abatements [C] refund of GST for foreign tourists (a system commonly prevalent in many other countries). All of these may substantially influence the final impact of GST on the Hotel industry. Page 3

4 Tax Structure in the Indian Hotel Industry Exhibit 4: Indirect taxes pertaining to the Hotel Industry Value Added Tax (VAT) Entertainment Tax State Taxes Source: ICRA research Luxury Tax Excise duty on liquor and tobacco Service Tax Excise duty Central Taxes Customs duty The Hotel industry is taxed under various heads by both the Government of India (GoI) and the State Government under whose jurisdiction the hotel property falls. Several of these tax components vary depending on the state. Further, the various indirect taxes (Exhibit 4) are levied on parameters varying from the type of service provided (rooms, banquets, F&B) and the location where the service is dispensed (in-room dining or restaurant/state). Owing to the plethora of taxes, there are instances in which the same service or product is concurrently taxed under multiple heads leading to high taxation for the industry. For example: [a] room accomodation attracts service tax as well as luxury tax [b] food consumed at restaurants attract service tax as well as VAT. Due to the high service tax component and the inabilty to avail complete input tax credit, hotels face a situation of high tax liabilities (under VAT) despite the availability of input-tax credits from others avenues (CENVAT credit on services, excise on capital goods). Further, input credit cannot be availed on a large proportion of the tax paid (luxury tax). Page 4

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Indian Hotel Industry Industry waiting out one of the longest down-cycle

Indian Hotel Industry Industry waiting out one of the longest down-cycle ICRA RESEARCH SERVICES Corporate Ratings Contacts: Subrata Ray +91 22 6179 6386 subrata@icraindia.com PavethraPonniah +91 44 4596