‘Attracts high-paying clientele’: Delhi High Court holds higher property tax on luxury hotels in Capital valid, in line with economic equity

“The imposition of a higher rate of property tax on luxury hotel establishments cannot be construed as arbitrary or capricious, particularly in light of the economic profile of the clientele such establishments are designed to attract.”

“These enterprises voluntarily situate themselves within a premium segment of the hospitality industry, offering high-end amenities and exclusive services that cater to patrons of considerable means, individuals who, by virtue of their financial capacity, are already contributors to the higher tax brackets across various statutory schemes … the legislative intent underlying the imposition of elevated property tax rates on such establishments is to equitably distribute the fiscal burden, ensuring that those possessing greater capacity to pay contribute proportionately to the public revenue,” he added.

The order also stated that this mechanism advances the tenet of economic equity, whereby taxation is calibrated to reflect not merely ownership, but also various other factors such as the economic stature and voluntary positioning of the establishment. “The star-ratings are based on a host of factors and are intended to target a certain section of society and thus, the hotels placed in a common star category share similar economic dynamics,” the court reasoned.

The court was dealing with a batch of petitions, majority of which were by erstwhile 5-star hotels in Delhi that were reclassified as 4-star hotels in 2022, challenging levying of property tax rate of 20 percent, against 10 per cent. A 20% property tax is applicable on hotels classified as 3-star and above. The oldest petition in the batch dates to 2004.

The court went on to record that “mere loss of profit is not a ground to declare a tax statute as unconstitutional”.

The luxury hotels had also objected to the inclusion of non-revenue spaces, like basements and stilts in “covered space”. The HC dismissed this objection, noting that regardless of its capacity of generating revenue, it is part of the larger building and is integral to its functioning.

Justice Kaurav reasoned, “…inclusion of ancillary areas such as garages, service areas, basements, and other non-revenue generating spaces within the definition of ‘covered space’ for property valuation purposes is not, in the view of this court, arbitrary or unjust.”

“The rationale for including such ancillary spaces lies in the comprehensive approach to property valuation, which seeks to ensure that all parts of a building, irrespective of their specific use, contribute to the overall assessment of property value…Furthermore, the spaces in question could not be held to be without any income-generating capacity in all cases…If not directly, their existence is often essential for the overall financial viability of the building and contributes to the income generation potential of the enterprise,” the court noted.