Luxury Tax Set To Kill The Golden Goose

Anindita Chattopadhyay - New Delhi

The Delhi government's decision to levy 12.5 per cent luxury tax on printed tariff in an effort to increase revenue from tourism by 100-120 per cent has left the tour operators and hotels in the lurch. The revised system of charging 12.5 per cent luxury tax on rack rate in effect will increase tax from 100 per cent to 300 per cent because although the published tariff of a room may be US$ 300, the tour operators probably would be selling it for US$ 100. Translated it means a guest pays 100 dollar for a room but 12.5 per cent luxury tax on 300 dollars.

That is, they would be paying 37.5 per cent tax, which is 300 per cent more. According to tour operators, they are in a catch 22 situation because customers can sue them if they charge extra than the quoted price. Hence, as always, they are taking the hit. However, some big tour operators apprehending the situation kept a clause 'taxes are subject to change' in the fine print to save their hide. For instance, Travel Corporation of India (TCI), which handled around 8,000 people in a week for the Dental Congress held in Delhi recently, requested the delegates (explaining the situation) to pay the tax differential to the hotels directly. Explaining the predicament of tour operators, Homa Mistry, regional manager, TCI said, "Increase in luxury tax has given rise to three situations. In case of FITs, we are requesting them to pay the tax differential that varies between US$ 15-25 depending on the hotel category. In case of groups, tour operators are forced to absorb the tax differential to maintain business relationship with foreign counterparts, while some hotels are trying to help by bringing down their printed tariff. But in case of new bookings where negotiations are still on many are dumping India in favour of other destinations."

Agreed Pranob Sarkar, director, Swagatam Tours, "We always give package rates inclusive of all taxes. Such sudden increase and frequent changes in taxes are viewed unkindly by foreign tour operators. So, once contracts are signed and brochures are made, Indian tour operators are forced to bear the extra tax burden. In today's situation, from a total package we will not really be making any profit because 80 per cent of tourists come to Delhi."

Hoteliers believe the government will stand to lose revenue as guests would be moving away from Delhi to neighbouring states, mainly Haryana and Uttar Pradesh. For the simple reason that Haryana and Punjab have no luxury tax at all, while Rajasthan has eight per cent on actual tariff and Uttar Pradesh has five per cent tax. According to Col Manbeer Singh, vice -president FHRAI, "Due to revised system of taxing already leisure groups are going to Gurgaon and Agra for overnight stay, while long-staying corporate guests are moving to Gurgaon and Noida. The occupancy in Gurgaon hotels have gone up from 70 per cent to 92 per cent in the past couple of weeks, while Delhi hotels have seen an immediate drop of 25 per cent."

But his opinion does not find much support from tour operators. Many think the Delhi hotels will not feel the brunt this year because they are booked choc-o-block till March. Further, Gurgaon has only Bristol and Hilton Trident, which do not offer enough rooms to take away the pressure from Delhi. So, may be only the lower end of the market will be shifted to Gurgaon, while Agra might be the choice while negotiating new deals.

However, the real repercussion, say industry captains, will be felt next year when fresh brochures will be made as added taxes will make India a shade less competitive. As Mistry pointed out, "Added taxes will defeat the purpose of attracting tourists and number of pages on India in foreign brochures will be brought down next year. As it is, our packages are around 60 dollar more expensive compared to other countries in the region because of high inland airfare, US$ 10 monument entry fees and increase in hotel rates this year from 60-80 dollars to 100-120 dollars."

So who stands to lose in the whole process? India as a whole and Delhi government in particular. If tourists stay away from India, Delhi government will have to grapple with the reality of empty coffers. It may be recalled that a similar situation occurred when luxury tax was imposed on published tariff in 1996. According to United Hotel Forum, due to this latest decision star hotels would lose Rs 50 crore foreign exchange business in the first six months and next year 5,000 youth may be rendered jobless. One wonders why the government took such a decision when with 20 per cent increase in foreign tourist inflow and 20 per cent increase in hotel tariff it already gained 40 per cent more revenue over the last year. With another 25 per cent growth expected October onwards, the government would have netted 45 per cent more revenue as it is. This is what we call killing the golden goose. Is anybody listening?