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PRE BUDGET REPORTS

Hotels: Provide infrastructure status

The Indian Hospitality industry currently estimated at USD 17 billion contributes 2.2 % of India's GDP and expected to grow to USD 36 billion by the end of 2018. Notably, Seventy per cent of the total contribution (USD 11.85 billion) comes from the unorganized sector and the remaining 30% (estimated at USD 5.08 billion) comes from the organized sector of the hospitality industry. So, the Organized sector's has huge potential and expected grow considering the low room penetration levels in Indian cities compared to the other Global cities in general and Asia-pacific cities in particular.

Further, The Indian hotel industry also witnessed an increase in the number of hotel rooms with a growth of 5% during the last three to four years. In the next two years, a total investment of USD 12.17 billion is expected will add over 20 new international brands in the hospitality sector. The rise of budget hotels in the country such as Ginger Hotels, Lemon Tree, Sarovar Hotels, Fortune Hotels, Ibis and Choice Hotels clearly suggest a huge growth potential in the sector.

Notably, The Union budget 2011-12 was set back to the Tourism and travel industry as the 5% Service tax on hotel accommodation in excess of declared tariff of Rs 1,000 per day charged to the customer with an abatement of 50 percent (10% after deduction). Also, the 3% service tax on air-conditioned restaurants has license to serve liquor with giving an abatement of 70 percent. Overall this had negative impact on the industry for 2011-12.

Union budget 2012-13 Expectations: Grant Infrastructure status to hotels

The Hotels should be included in the infrastructure projects just like Airports, Seaports, Railways, and Power etc. Earlier the hotels were added to the infrastructure list under the Section 10(23) g of Income Tax. However, the section was discontinued with effective from April 2007.

1. Inclusion of Hotels in the Infrastructure List: Extension of 35 AD to the Hotels

The Country earns over Rs 50000 crore in foreign exchange through about 5.8 million foreign tourist who visit India. It is projected that tourist arrivals will reach 10 million by 2010-11 provided the requisite inventory of hotel rooms could be made available. As far as domestic travelers are concerned the present demand will soar 500 million in the years ahead. There is at present only about 90000 guest rooms in the organized sector and hence the shortage of 80000 guest rooms. These required to be constructed to meet the present shortage of hotel rooms in the country with investment amounting to Rs 32000 crore required (at an average of Rs 40 lakhs per room).

Issues:

• The inclusion of Hotels in RBI's Infrastructure Lending List to be done immediately so that the various benefits accorded to the sector will apply to the Hotel Sector will facilitate immediate investment in the Hotel Sector. The extension of Section 35 AD to hotels can extend the financial assistance from financial institutions to the hotels.

Suggestion/Recommendation:

• The Hotels industry is capital intensive on the back of very high cost of land in metros and necessary that the hotels be given financial assistance like infrastructure projects with repayment schedule extended to 15 years with a moratorium of 3 years for construction and 4 years for the stabilization period.
• The infrastructure status also helps the Hotel industry to fund projects in Foreign Currency Term Loans (as per extant RBI norms on ECB's) at lower interest. So, the granting the infrastructure status is one of the key initiatives to boost the sector.

Issue:

• The budget of FY' 2010-11 has introduced tax of 5% on room revenue and 3% on Food & Beverage revenue. However, the same base room revenues and F&B revenues levied by the State government as Luxury Tax and central by the service tax.

Suggestion/Recommendation:

• The burden of multiple taxes imposed on guest room's accommodation as well as on F&B charges is higher compared to the neighboring destinations such as China, Japan, and Malaysia etc. So, pending introduction of the GST, levy of the Service tax on rooms and F&B of 5% and 3% respectively be withdrawn. Further, when GST introduced the total tax should not exceed 10%.

Other issues and suggestions:

• Modification of 35 AD in the income tax Act benefits the Assessee: The Hotels are also constructed by developers (Assessee) such as Real Estate companies and other developers such as Real Estate companies and other developers and given out on management basis to other specialized Hotel operators who have expertise in the running hotels. So, the hotels constructed and operated by the assessee would be eligible for the benefits under the modification of 35 AD.
• Section 80-IC: As per Section 80-IC of the Income tax act, any undertaking commencing any operation specified in the Schedule XIV and have undertaken substantial expansion during 7^th January 2003 to 1^st April 2012 to promote eco tourism in the special category states (like Sikkim, Assam, Tripura, Meghalava, Mizoram, Nagaland, Manipur, Arunachal Pradesh, Uttranchal and Himachal Pradesh) are exempt from income tax for five years, for promoting Eco Tourism in the country. But the Income tax authorities have denied deductions to Hoteliers on the ground that an activity of a hotel does not constitute an operation as specified in Schedule XIV of the Income tax act and they have also directed the hoteliers to explain the eco tourism activity in their project. The Hotel sector seeks liberal view to include hotel as an eligible activity of Eco tourism in Schedule XIV, to enable them to claim the above benefit.
• Deduction to be made in computing total income under Sec 80: While calculating the total income of an individual deduction of LTC paid to an employee to be admissible as in the case of other deductions via PF, Mutual Funds, LIC etc. This will promote domestic tourism all over India and increase revenues for the Government.
• Restore depreciation rate for hotels building to 20%: Till March 31, 2007, Hotels were eligible for a depreciation of 20% on their plant (building). There after, it was brought down to 10%. As hotel buildings are utilized for 24 hours, the depreciation rate can be restored to 20%.

Indirect Taxes:

• Exporters who earn convertible foreign exchange are exempted from Service Tax: The service tax paid on various services utilized for the export of various goods/products has been paid by an exporter would be refunded back to the exporter by way of duty draw back or provide some benefits or exemptions.
• Excise Duty: The food preparations in Hotels or Restaurants, which are basically for captive consumption by its guest, should be exempted from the Levy of Central Excise Duty. Also, Hotels and Restaurants with turnover less than Rs 1.50 crore should be exemption from paying central Excise duty on the products produced and consumed within the premises.
• The Rationalization of VAT/ Sales Tax and Other taxes under GST.

Analyst Expectation:

The second half of the fiscal is busy season for the Indian hotel sector contributes sizeable portion of the profits. However, the December 2011 quarter witnessed subdued performance. Recently the frontline players have hike hotel room rents, factoring in the buoyancy in tourist arrivals. Also, the sector is currently in the midst of adding rooms. Overall, there is more room for growth in profits of for the coming quarter. Further, the union budget 2012-13 should consider some important proposals like (i) Grant infrastructure status to Hotel industry (ii) Increase the depreciation of hotel building to 20% from the current 10% levels. (iii) Exempt the industry from the multiple taxes.

Scrip's to watch:

EIH, Indian Hotels, Hotel Leela Venture, Taj GVK

The Indian hotel industry has huge potential but is facing key challenges such as infrastructure; rising interest rates and inflationary trends. The sector has significant potential, but it needs to build the relevant infrastructure at appropriate locations. In this background, the sector seeks infrastructure status, which will make loans available easier and at finer rates, and will also enable attraction of capital at better valuations.