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Here's our wishlist Mr FM P Chidambaram Union Finance Minister In their pre-budget memorandums, FHRAI and HAI, the leading industry associations have listed out what they want from the Union Budget 2006-07. In our next issue we will analyse which of these demands on this wishlist were acceded to by the Finance Minister and which were ignored Proposals on Direct Taxes Grant of Infrastructure Status for hotels under The government has approved infrastructure status for hotels and have included them for concessions under section 10(23G) of Income Tax Act in Finance Act 2003. According to this, hotels of 3 star and above category can apply for infrastructure company status to the Ministry of Finance and get certain concessions in raising their equity and term loan resources. In practice this has not proved to be a significant incentive. However, this is only part of the concessions being given to other infrastructure sectors like roads, ports, telecommunication, power, airports etc. All of them get full benefits, including substantial income tax deductions, under section 80-IA of Income Tax Act. Hotels have a long gestation period. They may take two to three years period for construction and then the revenues and profitability are slow in realisation. Hotels also have a high multiplier effect in the economy, particularly in the local area where they are located, just like other infrastructure sectors like roads, airports and power. It may be noted that because of increased activity in construction of hotels, particularly in metro and other large cities in India, the cost of land suitable for hotels has gone up substantially. It is estimated that in some places it has gone up by as much as 300% over the last three years. This has made the construction of hotels and operating them with any reasonable rate of return on investment very difficult. This will certainly lead to a reduction in construction of new hotels for the next 2-3 years inspite of the fact that there will be shortage of accommodation in many destinations in India. The government has in the past announced proposals for viability gap funding for hotels and convention centres where the initial investment is high, there is a long gestation period and a lower profitability in the first few years. Income Tax exemption under Section 80-IA for new hotel projects will be equivalent to viability gap funding. The shortage of accommodation and very high prices of land are being felt most acutely in metro cities and construction of new hotels in these cities certainly needs support from the Government. It is recommended that hotels should get full benefits of infrastructure status under Section 80-IA of Income Tax Act The need for such a concession is even more in the current times as acute shortage of hotel rooms is being felt, which is definitely acting as a deterrent for growth of tourism in India. It is to be added here that any such concessions should also be allowed in the metro cities, which were excluded from Section 80-IB in the earlier periods. The shortage of accommodation and very high prices of land are being felt most acutely in metro cities and construction of new hotels in these cities certainly needs support from the government. It is recommended that hotels should get full benefits of infrastructure status under Section 80-IA of Income Tax Act. Depreciation rate for hotel buildings The depreciation rate for hotel buildings was fixed at 20% for many years. However for some reason Ministry of Finance issued a notification in 2002 and reduced the depreciation rate for hotel buildings to 10% with effect from 1.4.2003. The industry has represented against it but have not received any favourable response. A hotel's building is the main plant and machinery for the hotel. It provides the ambience, quality and standards for the hotel and connotes the star category of the hotel. The building and accessories in the hotel consume the major part of capital cost for a new hotel. Because of the nature of the business, hotel buildings need to be renovated, refurbished and refurnished on a continuous basis. They have to remain in a condition of high standards at all times irrespective of the cost. Government wants Indian hotels to attain global standards and to serve international tourists coming to India. The Indian hotel industry has earned a high reputation among international travellers. Considering these factors, the government need to appreciate that hotel buildings need a different consideration compared to other buildings like offices, educational institutions and hospitals. It is, therefore, requested that depreciation rate for hotel buildings may be restored to 20%. Fringe Benefit Tax Business related expenses like telephone, sales promotion, etc. are unnecessarily getting covered under FBT net due to deeming provisions. Meals provided in office are exempt but if there is reimbursements for the same then the same gets covered, which is leading to contradictory situation. Contributions to approved superannuation funds are also under the FBT applicable to the loss making companies. It is proposed that project study be undertaken and expenses pertaining to business should be excluded from the purview of the FBT. More especially the contributions to superannuation funds should be removed for the following reasons :- Existing superannuation schemes would be unviable in future The effective tax suffered by corporate would be more than 40%, since FBT is not tax deductible Employee receiving his pension from the fund would be paying his regular tax on the same. The FBT regime, which is based on Australian Model does not apply to contributions to superannuation funds. Threshold limits should be prescribed as applicable under the Australian Law. It is requested that FBT must be reviewed in the Budget proposals for 2006-2007 and should be rationalised. We agree with other industry associations that it is largely a tax on expenditure and not on income and is totally unjustified. Concession under Section 115(J) of Income Tax Act for the hotel industry The government had imposed Minimum Alternative Income Tax (MAIT) on the corporate sector in 1997 under Section 115(J) of the Income Tax Act. Subsequently this was exempted for all exporters. Hotel industry is now recognised as a service exporter and all the export benefits available to the manufacturing sector in the Exim Policy are available to it. There is thus no justification for denying it the exemption from MAIT, as has been given to other exporters. It is requested that this proposal may now be considered favourably. Proposals on indirect taxes Service Tax There has been a systematic inclusion of many services rendered by hotels & restaurants under the Service Tax Act, over the last few years. It may be recalled that Hotel Expenditure Tax was abolished in the year 2003 in response to the industry's plea, on the ground that the totality of taxes charged by the Union Government and the state governments have made the Indian tourism product internationally uncompetitive. However, Service Tax has been introduced and extended to hotels under various categories such as mandap keeper, convention services, health club & fitness centres, dry-cleaning service, rent-a-cab service, event management, beauty parlour & Internet access. Although some exemptions and rebates have been given by the Ministry of Finance, but they are with certain conditions. The Service Tax has virtually replaced the Expenditure Tax, which was earlier abolished in the interest of development of tourism in India. FHRAI, therefore requests that exemption be granted in respect of all the aforesaid Service Tax categories to hotels & restaurants without any restrictions and conditions. In many cases Service Tax is being charged on services in the hotels on which Sales Tax or VAT is charged by the State Government. In some cases the State Government is charging Luxury Tax on the same services on which Central Government is charging Service Tax ( e.g. Internet service). There should be a coordination between the Central Government and the state governments, perhaps through the Committee of State Finance Ministers, so that only one tax is levied on a particular service. Excise duty on cakes and pastries In the Union Budget of 2004 the government had increased the excise duty on cakes and pastries from 8% to 16%. We are grateful that this was reduced to 8% in the Union Budget, 2005. This excise duty is also applicable to cakes and pastries sold in hotels and restaurants. We had earlier also said in our representations that hotels and restaurants sell fresh bakery products which should not attract any excise duty. Even in the case of mithais, there is no excise duty except on branded packaged products. Our recommendation is that in the case of cakes and pastries also, there should be no duty on fresh and unpackaged products and any excise duty may be levied only on packaged products. Even apart from hotels and restaurants, these products are consumed and sold at the mass level particularly in the fresh form. They should be treated in the same manner as the mithais. It may be mentioned here that Sales Tax or VAT of the state governments is also levied on cakes and pastries sold in hotels and restaurants. The rate of Sales Tax in some states is very high. Even with VAT rate of 12.5%, the total tax on such products goes upto 20.5%. Ministry of Finance have taken a stand that an exemption upto a turnover of Rs. one crore is available to hotels and restaurants under the rules for SSI sector. It may be mentioned that many hotels and restaurants belong to chains at the company ownership level and the combined turnover of many chain hotels and restaurants at the company level exceeds Rs. one crore. This rule is, therefore, not providing relief to a large number of hotels and restaurants. It is recommended that excise duty may be exempted in case of fresh and unpackaged cakes and pastries, particularly for hotels and restaurants. Taxes on ATF - Airlines fares The airline fares in India are very high. It is a common knowledge that it is cheaper to fly from Delhi to cities like Bangkok, Singapore and Dubai compared to flying from Delhi to Chennai. Bangalore or Cochin. In fact, the airfares from Delhi to Bangkok, Singapore and other cities in neighbouring countries can get you airline ticket and stay of 3 room nights on the same price on which one will fly from Delhi to Chennai or Bangalore. This is definitely leading to erosion of domestic tourism, which is not able to realise its full potential. That is one reason why average annual occupancies of hotels in some resort destinations have been at low annual levels even in the current boom in foreign tourism to India. Although some cheaper airlines have come up, but they do not fly on many sectors. Moreover this is being largely offset by rising international oil prices. Airlines do not give any cheaper options on executive class fares, resulting in a scenario where such fares in some sectors in India ( e.g. Delhi-Trivandrum) are higher than excursion fares from Indian cities to London, other European cities and even to USA. The high airfares in India are mostly on account of government taxes on Aviation Turbine Fuel (ATF). It has been estimated that nearly 40% of price of ATF is accounted for by taxes alone. Apart from customs duty on crude oil and excise duty on ATF levied by the Central Government, high Sales Tax rates are being levied by many State Governments on ATF. These range from 20% to 39% in most of the States. It is recommended that Central Government may review the Customs & Excise duties on ATF. This is also now more crucial because of escalating cost of ATF on account of rising international price of crude oil. In this context, it is proposed that the customs duty on crude oil used in ATF and excise duty on ATF may be brought down to zero or near zero level. We are also recommending that ATF should be brought to the category of 'declared goods' by the Central Government so that a Sales Tax of 4% is levied uniformly throughout the country. This action will bring the airfares down by a substantial margin which will give a boost to the civil aviation and the tourism industry in the country. High rates of VAT and duplication with Sales Tax VAT, which has been introduced in many states in India, has a high rate of 12.5% for hotels and restaurants. Majority of hotels and restaurants are in the small and medium sector and this rate is pinching them and is affecting their turnover of business. Before the introduction of VAT, the Sales Tax in many states was at 8%. We understand that some states like Himachal Pradesh have already reduced the VAT rate for hotels and restaurants to 4% and some other states are also considering such a proposal. Our recommendation is that VAT rates in all the states should be reduced to this level, which can be facilitated by the Central Government through the Committee of State Finance Ministers. Many states are charging both VAT and Sales Tax, particularly on sale of liquor in hotels and restaurants. The rates of Sales Tax on liquor are particularly high in many states. There should be only one tax on a particular product, be it Sales Tax or VAT There is another problem. Many states are charging both VAT and Sales Tax, particularly on sale of liquor in hotels and restaurants. The rates of Sales Tax on liquor are particularly high in many states. There should be only one tax on a particular product, be it Sales Tax or VAT. This should also be rationalised at the level of the Central Government by issuing suitable guidelines to the state governments. Additional Customs Duty on Liquor Government introduced additional duty on imported beer, wine and spirits with effect from April 2001 in lieu of excise duties charged by state governments on domestic liquor products. We have been representing against it for the last 4 years, as there was no justification for this additional duty. The basic customs duty on liquor is already high at 160% and the high rate of additional duty or countervailing duty is taking the over all duty in certain price categories to about 600%. There was some rationalisation of additional duty based on landed CIF price segments in the budget of 2003, but it only provided a marginal relief. Moreover, the excise duties of state governments, if calculated on the landed CIF prices of imported products, come to the range of 15% to 25%. Any countervailing duty on imported liquor should thus remain within this range and not higher. Although hotels and restaurants earning foreign exchange have been granted a concession of zero duty imports, but this is applicable to only those hotels and independent restaurants who are approved by the Ministry of Tourism and earn a certain amount of foreign exchange annually. There are very large number of good hotels and independent restaurants who do not come in this category and are being forced to pay very high customs duty on imported liquor. It is requested that rates of additional duty on import of liquor may be reduced substantially overall and particularly for hotels and restaurants.
