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Indian Tourism – Dreams Unlimited…

Indian Tourism – Dreams Unlimited

Year after Year the industry associations and leaders have been pushing to get a handful of their demands approved by the Ministry of Tourism. Unfortunately and yet again July 06, 2009 did not bring any cheer to our face.

And who am I? – Just another professional from the industry who has been reading all the articles for so many years and yes the decisions does impact me and you till the time we are part of this great industry.

While the budget was all about AAM ADMI and did took call on some specific industries, it kind of kept a blind eye for the Tourism sector. The Finance Minister Mr. Pranab Mukherjee who was giving his second budget and a record of sorts considering that he gave the interim budget, got back to power and again had the task of giving the full annual budget.

The only exciting part or a silver lining so as to say is the fact that Fringe Benefit Tax has been abolished, Budget allocation for CWG 2010 has been increased, focus has been kept on infrastructure development.

The Fringe Benefit Tax or the FBT is a tax levied on privilege/service/facility that the company offers to its employee. This means that being a part of an organization and getting a benefit to travel or tour, or stay in hotels, or attend a conference, or a membership etc. gets taxed by FBT. The abolition of FBT means corporate will not shy away now from giving these benefits to their employees and save a little amount of tax as well. The MICE industry which is significant and an important contributor to the overall revenues of the hotel and indirectly contributing to revenues for a tour operator, airline as well also gets the benefit as more and more conferences get conducted at hotels.

But what next? Does a saving of marginal 6.8% FBT good enough to drive our business? I am still wondering on why we will abolish service tax for an exporter and not for someone who is doing the same job of getting FOREX into the country by means of tourism as his livelihood.

Anyways, let’s consider the infrastructure development. The FM has ensured greater flexibility for India Infrastructure Finance Company Ltd. (IIFCL), a special purpose vehicle set by the Central government in 2006 to provide long-term financial assistance to infrastructure development of airports, ports, railways and ports. This means that the flexibility will help to increase funds available for infrastructural projects at lower cost.

However this is going to take time may be 2 or 3 or may be a complete 5 year plan. The task is to be able to develop basic civic and infrastructure amenities in the country including modes of transportation. If it does deliver in a time line, it can help to promote domestic tourism and will benefit tourist movement in the long term. The word of caution here is that the development work that needs to be planned and implemented should not be taken up on the mercy of our ministers. Or else we will see a repeat of the Railway Budget announcements. Coach factories getting shifted from Bihar to Bengal, New Trains out of Bengal, Medical Colleges in Bengal and everything about Maa, Mati & Manush. I was wondering yet again – Who am I?

For the infrastructure development, the government needs to analyze the demand pockets in the country for infrastructural development. This can be achieved by getting professional bodies on board (Technopak is one resource) and getting the act together. Decisions today need to be made on the basis of a rational, a logic and some scientific findings.

The development of national highways with 23 per cent increase budget allocation for the year 2009-10 over the previous year is again a great step. The development of national highways is expected to benefit the Road Tourism segment in India with enhanced connectivity to destinations that are not accessible right now. The Road Tourism industry, which holds immense potential is yet untapped to its fullest capacity due to the challenges faced by the segment particularly with road infrastructural and the tax issues faced by the industry. But this has to be combined with infrastructure development on hotels, airports, railway stations, transport options and most importantly the overall destination. Though an important question unanswered here is that what is the contribution of Road Tourism overall in the tourism sector. A visitor going on a Golden Triangle tour was, is and will continue to go by road or rail. And the connectivity is good enough. As a honeymoon destination to Kerala, a visitor from Delhi will take the option to either fly and may be travel by rail. So a highway construction might not be a great solution, unless the agenda here is again to what we saw before the previous term elections where just closer to the date various NH projects were introduced and all roads saw portraits of our BJP leaders and talking about the development work they are doing. Come on guys, this is not a billboard activity. We are talking about some serious money being spent.

The government has also increased allocation for Common Wealth Games 2010 from Rs 2,112 crore to Rs 3,472 crore. Well a lot has been spent on the same with some great criticism coming initially on the way things were going at a snail’s pace. I am not sure how much has been spent and what is the current status of projects, while I do read that the Delhi CM is herself conducting routine meetings to drive the efforts. I hope it works well for the city and our country as a whole. The breakup of funds allotted for the Common Wealth Games has not been specified and it will again be crucial to not what is being spent on stadiums, games village, accommodation, transportation civic amenities, landscaping, etc.

And for next year a recap of our demands yet again (collated info)

(a) Do not equate the hotel sector with real estate
The RBI has equated the hotel sector with real estate in the circular dated June 29, 2005. Due to a higher risk perception, the interest rates are typically increased by 3 per cent to 4 per cent per annum. The hotel industry should be granted infrastructure status under Income Tax Act as well as in RBI definition.

(b) Rationalize tax structure
In order to remain competitive with other destinations in Asia like Malaysia, Indonesia, etc, which has a low level of taxation, hotels in India need to be subjected to a rational tax structure

(i) Direct taxes
Section 80IA: Infrastructure status for the hotel industry
In the list of infrastructure projects, hotels may be included just like airports, seaports, and railways, etc.

In fact under Section 10 (23) g of the Income Tax Act, hotels were added to the infrastructure list so that the interest received by financial institutions and banks for loans extended to hotels were tax exempted. However, the section itself was discontinued with effective from April 1, 2007. All new hotel projects will be able to avail the benefit of deductions of 100 per cent with respect to profits and gains for a period of 10 years. This will lead to many new hotel projects being set up, with companies re-investing their profits in the hotel sector.

Further, it will help in channeling huge investment about Rs 50,000 crore (Rs 500 billion) in the tourism sector in next 3-4 years and quickly bridge the shortfall of hotel accommodation.

Deduction in respect of earnings in convertible foreign exchange under Section 80HHD
Section 80 HHD gives tax exemption from the export profits to exporters. If this is granted to the hotel industry, it would help companies to reinvest profits for building additional capacity.

Section 80-IC
As per Section 80-IC of the Income Tax Act, any undertaking commencing any operation specified in the Schedule XIV and having undertaken substantial expansion during the period from January 7, 2003, to April 1, 2012, to promote eco tourism in the special category states (like Sikkim, Assam, Tripura, Meghalaya, 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 the 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 a liberal view to include hotels 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 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.

Section 80-ID
In the Income Tax Act 2007-08, Section 80 ID was introduced to give encouragement to 1, 2, 3 and 4 star hotels and convention centres of a minimum seating capacity of 3,000 persons being set up in the National Capital Region of Delhi, Gurgaon, Faridabad, etc, for the Commonwealth Games in 2010.

A tax holiday for five years was granted to these hotels that would open before March 31, 2010.
The areas covered under this section were further expanded in the Budget proposal 2008 to several other locations. Presently, the benefit is extended to new hotels set up in the specified region and the benefits are not allowed to substantial expansions of hotels and resorts in these regions.

Substantial expansions of room capacity in excess of 30 per cent of the existing capacity should also be treated eligible for the tax holiday benefits. The coverage of the benefits granted under this section should be extended to all categories of hotels throughout the country, and those which open in the next 10 years.

Section 32
Hotel buildings are considered as plants for the hotel industry as they are utilized for 24 hours. The industry is required to make heavy investments in renovation, upgradation and upkeep of the hotel buildings at all times to keep it in pristine condition.
Section 32 of the IT Act should be amended to restore the depreciation rate to 20 per cent.

(ii) Indirect taxes
Service tax
Hotels and other tourism related service providers who earn foreign exchange have been included as the 13th sector in the Service Export Promotion Council set up by the ministry of commerce, government of India.
As such, they may be granted exemption to the extent of foreign exchange earned for the following services provided by the hotels, i.e. banquet rentals, rent-a-cab, dry cleaning services, health club or fitness centre services, beauty parlor services, internet cafe services, club/association service, business support services, business auxiliary services, management consultant services, renting of immovable property, etc.

Custom duty
The customs duty structure should be rationalized for hotels and restaurants in tune with the international practices, to enable the Indian service sector to compete with their international counterparts.
This is specially so for import duty payable by small sized hotels and restaurants who do not earn substantial foreign exchange and therefore, are not eligible for any of the Export Promotion Capital Goods schemes.

Excise duty
Seeks excise duty exemption on supply of food preparations (as part of their food and beverage services) by hotels or restaurants to their by guest (staying in the relevant hotel).
Also, hotels and restaurants with turnover less than Rs 1.50 crore (Rs 15 million) should be exemption from paying central excise duty on the products produced and consumed within the premises.

(c) Interest subvention to employment intensive sectors
The 2 per cent interest subvention extended to employment-intensive sectors like textiles, leather, marine and handicrafts as announced in the relief package announced by the government of India on December 8, 2008, should be definitely extended to the hotel sector as their employment generation capacity is much more than these sectors.

(d) Declaration of tourism as an industry under the Industries Act 1951
Many states in India have already granted industry status to tourism and the industry seeks the remaining state governments as well as the central government to recognize tourism as an industry.
It is also requested to declare tourism as an industry under the Schedule 1 of the Industries Development Act, 1951.

(e) Luxury tax
Luxury tax varies widely across services and states. Also, in the most of sales it is charged on the published tariff by not considering the commissions paid to agents and discount offered to walk-in clients.
So the industry seeks exemption of luxury tax on the room tariff less than Rs 2,500 and to charge a uniform rate of 4 per cent on the actual tariff where room rent is Rs 2,500 or more per day.

(f) VAT/Sales tax and other taxes
Vat/Sales tax on food & beverage are different for each state and it should be uniform over the country. It will help in many hotel projects coming up all over the country which leads to lowering hotel tariffs and generating employment.

So till the next time when we again go for elections, let’s keep the note ready to hand it over to hopefully the same or a new Tourism Minister to push our case. I think it’s time for people like Amitabh Kant to be on hot seat and not only draft policies but push our case with the Government as well.

Till such time the Tourism Sector Dreams and Dreams …..and Dreams really hard for them to become reality soon enough!!




July 13, 2009 Posted by | Uncategorized | , , , , , , , , , , , | Leave a comment