Tax holiday for Hotels

The government is planning to offer a five-year income-tax holiday to five-star, three-star, two-star and budget hotels. The matter would be discussed in the National Development Council’s meeting headed by prime minister Manmohan Singh on December 9.

Once approved in NDC, the proposal may form part of next year’s budget announcements. The proposal comes in the wake of acute shortage of hotel rooms acting as a spoiler for country’s booming tourism. At present, India faces a shortage of 1.5 lakh rooms.

According to government estimates, foreign arrivals in India increased 85.8% to 4.4 million in 2006, up from 2.4 million in 2002. India received over Rs 29,600 crore as foreign exchange revenues from tourism in 2006 registering a growth of 17.6% over 2005.

With high occupancy rates forced by country’s acute room shortage, tariffs have hit the roof over last three years even among lower star categories. “Hence tax sops have been proposed to kick-start rapid development of hotels to take on the influx of tourists into India,” a government official said.

Fresh tax concessions were allowed in the Budget 2007-08 to promote infrastructure facilities. A five-year holiday from income tax was allowed for two, three or four star hotels in the National Capital Region (NCR) including Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar.

The step was aimed at meeting the requirement of 20,000 additional hotel rooms for the Commonwealth Games, 2010. The government now feels that same sops to should be extended to hotels across the country to meet shortage of rooms.

The proposal would place hotel projects at par with other infrastructure projects. Infrastructure status for the tourism sector has been a long pending demand of the industry. However, it is yet to find favour of the finance ministry.

According to a report by hospitality consultants HVS International, average room rates among three-star hotels grew 22.4% from fiscal 2004 to fiscal 2006, to Rs 2,044 per night. One reason for this has been shortage of rooms, especially during peak tourist season. It is expected that unless the estimated 1.5 lakh rooms (1.1 lakh in budget category) comes up at rapid pace, room prices would remain firm.

Apart from tax holiday, government may also consider special incentive for hilly areas, rural areas, places of pilgrimage, North Eastern region including Sikkim, J&K, Uttranchal and Himachal Pradesh. A subsidy would be offered on the basis of room created in these areas.

Tourism has been identified as an important sector for increasing country’s foreign exchange earnings. During Eleventh Plan the government is likely to provide a budgetary support of Rs 5,156 crore for the sector.