Hotels: Service tax hiked from 10% to 12%

Budget Provisions:

The service tax increased from the 10% to 12%.

The Cascading taxes has been reduced significantly by permitting utilization of input tax credits in a number of services such as catering, restaurants, hotel accommodation, pandal and shamiana and transport sectors.

The food preparations containing fruits and vegetables falling under chapter 20, which are prepared and served in a hotel, restaurant or retail outlet whether or not such food is consumed in such hotel, restaurant or retail outlet is being fully exempted from basic excise duty.

At present, there is 100% deduction (investment-linked) available under section 35 AD is allowed to an assessee engaged in the business of building and operating hotel whereby the deduction can only be granted to the owner of a hotel if he himself operates.

However, it is proposed in the current budget that while continuing to own the hotel, he can transfers the operation of such hotel to another person (Franchise) and the assesse shall be deemed to be carrying on the specified business of building and operating a hotel.

This amendment will take effect retrospectively from 01st April 2011 and will accordingly apply in relation to the assessment year 2011-12 and subsequent assessment years.

The travel industry is expected to benefit as the dual structures of maximum service tax of Rs 150 and Rs 750 in case of economy class travel is being replaced by an ad volrem rate of twelve percent with abatement of sixty percent subject to the condition on inputs and capital goods taken.

This expected help the rise in demand for the hospitality sector.

Industry Expectations not fulfilled:

• Grant infrastructure status to Hotel industry -- not fulfilled
• Increase the depreciation of hotel building to 20% from the current 10% levels – not fulfilled
• Exempt the industry from the multiple taxes -- partly fulfilled

Budget Impact

The increase in service tax from the 10% to 12% expected to negatively impact the industry.

However, the reduction of cascading taxes by providing tax credits expected offset this. Also, the allowing 100% deduction to the franchise model (operated by other) is positive to the sector.

Scrip's to watch

EIH, Indian Hotels, Taj GVK and Hotel Leela Ventures

Outlook

The Union budget 2012-13 has been relatively insignificant to the Hotel sector.

As the key industry expectations such as the Grant infrastructure status to Hotel industry and increase the depreciation of hotel building not happened.

However, the increase in service tax will negatively impact the industry.

But, providing the tax credits to reduce cascading taxes and allowing deduction to for the hotel operated by others (owned by the assessee) were the key positives.

Overall, the impact on the sector is neutral.