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Delhi’s luxury tax policy has Gurgaon hotels smiling

The glitzy new luxury hotels in Gurgaon have started eating into the profits of Delhi’s five-star hotels.

Written by Sobhana K | New Delhi |
June 18, 2010 3:45:17 am

The glitzy new luxury hotels in Gurgaon have started eating into the profits of Delhi’s five-star hotels. With Gurgaon offering rooms at a bargain and Delhi sticking to the policy of charging luxury tax on rack rate,instead of the actual room rent,more than a fifth of the city’s regular clientele has already shifted base across the border.

With Delhi adamant on not changing its luxury tax policy,a worried Hotel and Restaurant Association of India recently met Chief Minister Sheila Dikshit to request her to make the rules more flexible by charging tax on actual room rate. As of now,even if a hotel gives discount to a customer,they have to pay the luxury tax on the actual room rate. This exodus of guests to Gurgaon has resulted in Delhi recording 16.18 per cent loss on luxury tax in the first two months of this fiscal as compared to the corresponding period last year.

“Gurgaon also has the advantage of being closer to the airport. It also falls on the route to Jaipur,which is why a lot of European tour operators are now choosing Gurgaon over Delhi,” said Subash Goel,chairman of the Chamber of Commerce’s committee of aviation and tourism. Even airlines have started preferring Gurgaon hotels over Delhi,though both cities have a 10 per cent luxury tax.

“We fear that if this trend continues,then Gurgaon will become the first choice for tourists. Already they have 5,000-6,000 rooms with nearly 10 new five-star hotels coming up soon,” said Rajender Kumar,president of the Hotel and Restaurant Association of India,adding that hotels in the Southwest Delhi and those closer to the Haryana border are worst-hit.

Meanwhile,a study conducted by the Delhi government has concluded that switching luxury tax from rack rates to actual will affect the revenue. Delhi,incidentally,earns the highest amount of luxury tax among all states in the country.

“Our study has clearly revealed that all the states who are charging on actuals have very low luxury tax collection. Delhi too charged on actual rates between 2000 and 2004 during when our revenue collection dipped by several crores,” said a senior Excise official. In 1999-2000,the government had earned Rs 115 crore through luxury tax,but after the switch next fiscal the revenue dipped to Rs 60 crore in 2003-04,forcing Delhi to bring back the old system.

The Excise officials also argue that it will be difficult to collect luxury tax on actuals as the rates will vary between different hotels and it be difficult to verify how much the hotels are charging. Delhi has only 30-odd inspectors who inspect everything from cinema halls to hotels. The government also quotes the example of Karnataka where the government suffered a loss of Rs 131 crore within a year of switching from luxury tax on rack rates to actuals.

Hotels in Delhi

Five-star hotels

Rs 14 crore
Average luxury tax earned a month

Falling revenue
April 1 – June 8,2010
Rs 31.61 cr

April 1 – June 8,2009
Rs 37.71 cr

The government is thinking of increasing the threshold of luxury tax. At present,any hotel room which charges Rs 500 or more is taxed. The plan is to increase this to rooms worth Rs 1,000 or more. The hotel industry has also agreed that the government could charge a higher tax in case they are charging it on the actual rate.

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