EXPECTED BUDGET IMPACT: Neutral
LONG TERM OUTLOOK: Positive
Indian hotel industry has huge growth potential. However, we stand poorly in terms of hotel infrastructure when compared to developed and developing countries. Hotel projects have long gestation periods as they require huge investments of which the bulk is accounted by land and building. Currently, hotel industry comes under the real estate sector and is subject to rules that apply to the real estate sector. Banks consider real estate lending as risky and since hotel projects are classified under real estate, lending to hotel projects attract higher interest rates. The industry is also looking to get some tax rationalization and single window clearance for various licenses.
In the last union budget, infrastructure status was granted only to three-star or higher category hotels that are located outside cities with a population of more than one million. The Federation of Hotel and Restaurant Associations of India (FHRAI) argues that such hotels cover only five per cent of hotel rooms in the country. India's hospitality industry, saddled with high debt levels, is demanding an extension of the infrastructure status to all classified hotels. Recently, the Reserve Bank of India (RBI) has revised the definition of 'infrastructure lending' to bring in line with the last union budget.
Indian hospitality industry is an over taxed industry and the same are being passed on to the customers. Value Added tax (VAT), varies across the states, from as low as 12 to 20% on food and liquor. Service tax which is 5%, then we have an excise on the produce and manufacturing capacity. So the total tax add on is 20% on the customer.
High service tax and rent is actually hampering the growth of the industry. If taxes are reduced there will be more consumption and base will grow. The hospitality industry, the hotels and restaurants together cater to a wide segment.