After getting the Presidential approval, the 122nd constitutional amendment bill is now entering the final phase. The final drafting of the CGST and IGST law is being done at the centre, while the states are concentrating on the SGST law. All the three laws are to be tabled in the winter session of the Parliament for approval. The GST council will also present the GST rate and the exempt items list besides other critical details. The government is on its toes to work out the implementation of the GST bill from April 2017. The various sectors have been working on the aspects of the GST bill and analysing the impact of the same. Let us review how the GST is likely to affect the hotel and tourism industry.
At present, the hotel and tourism industry are impacted by multiple taxes as well as cascading of taxes. The three taxes that are levied are the VAT and luxury tax by the states and the service tax by the centre. The VAT varies from state to state and the value lies between 12 to 14.5%. Similarly, the luxury tax depends on the room tariff and the state. The value generally varies from nil to 12%. The service tax varies on the type of service. In the case of room tariff, the service tax is applied on 60% of the value or around 8.7% of the total room tariff. For food and beverage bills, 40% of the total bill attracts the service tax. It comes to around 5.8% when considered on the total F&B bill. In the case of marriage ceremonies, conferences and meetings in the hotels a 30% abatement is given and the effective service tax rate works out to 10.15% on the total charges.
When the VAT, service tax, and luxury tax are combined the total impact goes up and lies between 20 to 27 per cent. With the GST implementation, the multiple taxes would be replaced by one single tax, the rate of which is likely to be between 17 to 19 per cent. The hotel and tourism industry would benefit in the form of a lower tax rate which should help in attracting more tourists to India. However, the luxury tax is not applicable on all transactions and the GST rate may be at par or higher in such cases. The hotel industry would definitely prefer a lower GST rate between 10 to 15 per cent.
Another factor that is bothering the hotel and tourism industry is the fact that alcohol and electricity are out of the purview of GST. The taxation on alcohol would be different than the single GST rate. The hotel industry consumes a lot of electricity as a prime consumable and the levy of electricity duty would also not be covered in GST. Thus the hotel and tourism industry would not be able to avail the input credit on the two items.
The hotel and tourism industry spend a lot of money on construction and renovation. They have to move with the times in order to remain competitive and attract customers. The money paid as taxes on the construction activities cannot be used as input credit to set off the taxes paid on the services offered by the hotels, restaurants, and tourism industry. The R&D cess which is applicable on technical know-how fees and franchise agreements in the industry is likely to become a part and parcel of GST. All this is going to simplify the taxation procedure for the hotel and tourism industry.