HOTEL INN-DIA

NITIN PAHILWANI CHARTERED ACCOUNTANT

MARCH, 2013

1. Introduction _________________________ 1 2. Hospitality and Tourism ________________________ 2 3. Hotel Classification ________________________ 4 4. Finance

4.1 Inclusion in Priority Sector Lending ______________ 5 4.2 Delinked from Commercial Real Estate ______________ 5 4.3 Foreign Direct Investment _______________ 5 4.4 External Commercial Borrowings _______________ 5

5. Hospitality Development and Promotion Board __________ 7 6. Taxation

6.1 Income Tax ________________________ 8 6.2 Luxury Tax ________________________ 9 6.3 Service Tax ________________________ 10 6.4 Value Added Tax ________________________ 11

7. Foreign Trade Policy 7.1 Served from India Scheme [SFIS] _______________ 12 7.2 Export Promotion Capital Goods Scheme [EPCG] ________ 13

TABLE OF CONTENT

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P. Chidambaram ended his budget speech with Saint Tiruvalluvar’s quote “What clearly eye discerns as right, with steadfast will and mind unslumbering, that should man fulfill”. The mool mantra stated in the budget “Higher growth leading to inclusive and sustainable development”. This year’s budget is more focused on reducing government deficits, subsidies and expenditure While India’s recent slowdown is partly rooted in external causes, domestic causes are also important. Following the slowdown induced by global financial crisis in 2008-09, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 percent and 9.3 percent respectively in 2009-10 and 2010-11. However, with economy exhibiting inflationary tendencies, the Reserve Bank of India started raising policy rates in March, 2010. High rates as well as policy constraints adversely impacted investment and in the subsequent two year viz. 2011-12 and 2012-13, the growth rate slowed to 6.2 percent and 5.0 percent respectively. Nevertheless, despite this slowdown the Compounded Annual Growth Rate (CAGR) for Gross Domestic Product at factor cost, over the decade ending 2012-13 is 7.9 percent. After achieving double digit growth continuously for five years and narrowly missing double digit in the sixth (between 2005-06 and 2010-11), the growth rate of the service sector also declined to 8.2 percent in 2011-12 and 6.6 percent in 2012-13 the sector was Trade, Hotels and Restaurants, Transport and Communication, and its growth further declined in 2012-13. Along with construction, Tourism is one of the largest sectors of the service industry In India. It is capable of providing employment to a wide spectrum of job seekers from the unskilled to the specialized, even in the remote parts of the country. Compared to other modern sectors, a higher proportion of tourism benefits (jobs, petty trade opportunities) accrue to women. Hence, growth of the tourism sector is more inclusive than other sectors.

INTRODUCTION

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International tourist arrivals grew by 4% in 2012 to reach 1.035 billion, according to the latest UNWTO World Tourism Barometer. International tourist arrivals surpassed 1 billion for the first time in history in 2012. Emerging Economics regained the lead with 4.1% over advanced economics 3.6%, with Asia and Pacific showing the strongest results with increase of over 7%. Growth is expected to continue in 2013 only slightly below the 2012 level (3% to 4%) and in line with UNWTO long term forecast. Receipts confirm positive trend in arrivals in India with receipts from international tourism increase by over 22% up to nine months ending 2012.

The number of Foreign Tourist Arrivals in India during January-July, 2012 registered a growth of 6.6% over corresponding period of 2011. The number of FTAs in India during 2010, 2011 and January-July, 2012 were 5.78 million, 6.29 million and 3.76 million respectively. Some of the factors responsible for International Tourist Arrivals in any county are economic conditions of the source markets, connectivity, availability of reasonably priced hotel accommodation, good tourism infrastructure.

12th Five Year Plan The 12th Five Year Plan is focused on Infrastructure development by developing integrated tourism destination and circuits, Identify and development of clusters, new tourism products, Tourism Park and rural tourism.

Accommodation Units The existing accommodation units may not be sufficient for the targeted number of FTAS and DTVs in 2016. The availability of number of rooms in 2010 and requirement of additional rooms in 2016 for the targeted growth of tourism during the 12th Five Year Plan are given below:

TOURISM AND HOSPITALITY

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Availability of Hotel Rooms 2010

Classified 1,28,771 Unclassified 25,83,519 Total 27,12,290

Requirement of Hotel Rooms 2016

Classified 3,10,523 Unclassified 46,61,807 Total 49,72,330

Additional Requirement in 2016

Classified 1,81,752 Unclassified 20,78,288 Total 22,60,040

Foreign Tourist Arrivals The Working Group on Tourism for 12th five year plan, set up by Planning Commission, has recommended a target growth in domestic tourism of about 12% p.a. during 12th Five Year Plan period. The Group also recommended to increase India’s share of International Tourist arrivals to at least 1% by end of 12th plan required annual growth of about 12%.

Visa on Arrival Scheme Government introduced “Tourist Visa-on-Arrival” Scheme for tourists from Eleven Countries. Countries include New Zealand, Japan, Indonesia, Phillippines, Singapore, Finland, Cambodia, Vietnam, Luxemberg, Myanmar and Laos. Apart from this, Union Minister Shri K Chiranjeevi, 1St March, 2013, has submitted a proposal to extend Visa on Arrivals to 16 more countries. “International tourist arrivals surpassed 1 billion for the

first time in history in 2012”- UNWTO

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In July, 2012, Ministry of Tourism has revised the Hotel Classification Guidelines. Hotel Project must apply for Classification within 3 Months of commencing operations. The Hotel & Restaurant Approval & Classification Committee (HRACC) under Ministry of Tourism (MoT) inspects and assesses the hotels based on the facilities and services offered. Classification approvals will be valid for 5 years. Local approvals require:

· Municipal Authority · Concerned Police Authority · Any other local authority as maybe applicable / required (viz. Pollution

Control Board / Ministry of Environment & Forests etc.) · Approval / NOC from Airport Authority of India for projects located near

the Airport

HOTEL CLASSIFICATION

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Inclusion in Priority Sector Lending For the purpose of Harmonising the definition of “Infrastructure Lending”, RBI on 20th November, 2012 include three star or higher category classified hotels located outside cities with population of more than 1 million in the Definition of Infrastructure Lending. This would enable the hotel industry to avail financial assistance more easily and relatively lower interest rate.

Delinked from Commercial Real Estate (CRE) The Reserve Bank of India (RBI) has de-linked credit for hotel projects from Commercial Real Estate (CRE), thereby enabling hotel projects to avail credit at relaxed norms and reduced interest rates

Foreign Direct Investment Foreign Investment is freely permitted in almost all sectors. Under Foreign Direct Investment scheme investment can be made by non-resident in India under two routes; 1. Automatic Route 2. Approval Route

100% FDI is allowed for Hospitality sector under Automatic route For Foreign technology agreements, automatic approval is granted if

· Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy

· Up to 3% of the net turnover is payable for franchising and marketing/publicity support fee, and

· Up to 10% of gross operating profit is payable for management fee, including incentive fee.

External Commercial Borrowing (ECB) Hospitality Sector is eligible borrower. They can avail External Commercial Borrowing (ECB) facility up to US $ 200 million during the financial year for setting up new hotel projects or for meeting foreign currency and/or rupee capital expenditure. The proceeds should not be used for acquisition of land.

FINANCE

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Indian companies in the hotel sector (with total project cost of INR 250 crore or more), irrespective of geographical location, avail ECB’s for repayment of Rupee Loans availed of from the domestic banking system and/or fresh rupee capital expenditure under automatic route subject to 75 percent of average annual export earnings realized during the past three financial year or 50 percent of the highest foreign exchange earnings realized in any of the immediate past three financial years, whichever is higher.

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Construction of hotels is primarily a private sector activity which is capital intensive and has a long gestation period. The constraints being faced by the hotel industry in addition to the high cost and limited availability of land is the procurement of multiple clearances / approvals which are required from the Central and State Government agencies for hotel projects. In some cases as many as 65 or more clearances/approvals are required by hotel projects which vary from State to State. The often cumbersome process involved in obtaining multiple clearances for the hotel projects results in:

· Delay in implementation of the project. · Cost escalation making the project less profitable and often unviable. · Discourage Promoters for investing in such projects. · In some instance, the project is stopped midway and restructured for some

other use such as apartments etc. · Delay in implementation of the project.

To address the constraints being faced by the hotel industry in obtaining multiple clearances, and to streamline the system for speedy clearances of hotel projects, the Government has approved the setting up of a ‘Hospitality Development and Promotion Board (HDPB)’ for hotel projects. The HDPB will not supersede any statutory clearances required by other ministries/agencies. However, the regular monitoring and reviewing would increase their accountability. The review and monitoring would put pressure on the concerned agencies / departments to adhere to stipulated time schedule. The board can at any time take up any matters of concern to the highest level of the Central/State Governments. The clearances to be given by the concerned agencies would be based on their statutory provisions.

HOSPITALITY DEVELOPMENT AND PROMOTION BOARD

Now, Indian Hotel Companies can avail ECB for repayment of Rupee loan

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INCOME TAX Income tax is chargeable based on Residential Status and Place of accrual or receipt of income. It also depends on which form of business you are operating. Income Tax provisions are different for Sole proprietor, Partnership firm, LLP or Company. As far as hotels are concern, Income Tax further depend on following consideration

1. Ownership and Management 2. Hotel Management Agreement

2.1 Lease Out Hotel 2.2 Operating and Management of Hotel 2.3 Franchise Agreement

Tax implications to be considered based on business arrangement made between parties Following are incentive available in Income Tax especially for Hospitality Sector.

1. Profit Linked Incentive under section 80ID of the Income Tax A deduction of an amount equal to 100% of Profit and Gain from for the first 5 consecutive years for 2, 3 and 4 star category hotels, located in all UNESCO declared World Heritage sites (Except Mumbai and Delhi) for hotels constructed and starts functioning from 1st April, 2008 to 31st March, 2013.

2. Incentive under section 80IE of Income Tax for undertakings in North-Eastern States A deduction of an amount equal to 100% of Profit and Gain for 10 consecutive years for those who undertakes substantial expansion during the period of April 1, 2007 and March 31, 2017 in any of the North-Eastern States. Eligible business for this purpose are Hotels (2 Star or above), adventure and Leisure Sports. Substantial Expansion means increase in investment by 25 per cent of the book value.

TAXATION

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3. Investment Linked Incentive under Section 35 AD of the Income

Tax An investment linked deduction Under Section 35 AD of the Income Tax Act has also been announced in the Union Budget 2010-2011 for establishing new hotels of 2 star categories and above as classified by the Central Government, all over India thus allowing 100% deduction in respect of the whole or any expenditure of capital nature excluding (land, goodwill and financial instruments) incurred during the year for establishing new hotel.

Luxury Tax Luxury Tax on Hotel Accommodation in State Matter and they have the power to levy luxury tax on hotel tariff. Taxes range from 4% to 20% and on printed tariff to actual tariff. There is exemption limit for each state for tariff below that limit is exempt from the purview of Luxury Tax. The States/UT like Arunachal Pradesh, Andaman & Nicobar Islands, Sikkim, Orissa, J&K, Puducherry, Daman & Diu and Dadra Nagar Haveli are exempt from Luxury Tax. In certain states, these exemption limits were fixed long time back and have not revised according to inflationary trends.

Illustrative rates of Luxury Tax

Maharashtra Gujarat On Actual Tariff On Printed Tariff

Up to 750 Exempt Up to 500 Exempt 750-1200 4.4% 500-2000 4% 1200 and above 10% 2000 and above 6%

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Service Tax Hotel Accommodations From July, 2012, Accommodation Service in hotel for declared tariff of more than Rs.1000/- per day is come under a purview of service tax. Therefore if declared tariff is less than Rs.1000/- then no service tax is levied. There is an exemption/abatement of 40% of the gross value provided Input Cenvat Credit is not availed or service provider has not availed exemption regarding goods and material sold during the course of providing taxable service (No.12/2003-Service Tax).

Restaurants From July, 2012, Service provided in relation to food and beverages by air conditioning restaurants with a licence to serve alcoholic beverages are taxable in service tax. Therefore restaurants without licence to server alcoholic beverages and does have air-conditioning facility are exempt from the purview of service tax. There is an exemption/abatement of 60% of the gross value provided Input Cenvat Credit is not availed or service provider has not availed exemption regarding goods and material sold during the course of providing taxable service (No.12/2003-Service Tax).

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Budget Amendments Earlier, Service Tax does not apply to air conditioned restaurants that do not serve liquor. The distinction is now removed and Government proposes to levy service tax on all air conditioned restaurants. This Change has mostly cover all restaurants specifically in Gujarat. Only Terrace restaurant doesn’t come in purview of service

Banquets Service of Banquet Hall provided by Hotel for any occasion along with catering services or any other service then Hotels can avail exemption/abatement of 30% of the gross value. Sale of Space/Time for Advertisement other than by radio/television is exempt from Service Tax levy as included in Negative List of Services. Bundled Service In case of an event, which is a mix of various overlapping services, the services which give the most pre-dominant colour would be the category under which the same should be taxed as per the new section 66F of Finance, 1994 as applicable from July, 2012. For e.f.

· In case of 2N/3D package for accommodation with meals; the pre-dominant category would be accommodation even if the customer has food in the same restaurant like other walk-in customers. Hence, the hotel needs to charge service tax on 60% value of the total consideration.

Value Added Tax

Just like Luxury Tax, Value Added Tax is also State Matter and they have the power to levy VAT on Commodities. Different states have different approach and rate for e.g. VAT on Food Item ranges from 5% to 16.84% in various states. Similarly VAT on Liquor varies from 13% to 58%.

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Served From India Scheme (SFIS)

This scheme is great boast to Hospitality Industry in providing international standard quality service to foreign guest. In this scheme, the Service Providers entitled to Duty Credit Scrip equivalent to 10% of free foreign exchange earned during current financial year. Foreign Exchange earned through International Credit Card and other instruments as permitted by RBI shall also be taken into account for computation of Duty Credit Scrip. Duty Credit Scrip may be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables, which are otherwise freely importable and/or restricted under ITC (HS). Hotels, Clubs having residential facility of minimum 30 rooms, golf resort and stand-alone restaurant having catering facilities, Duty Credit Scrip may also be used for import of consumables including food items and alcoholic beverages. These entitlement shall be non transferable (except within group company and managed hotels). Duty Credit Scrip shall be valid for a period of 18 months and permitted for payment of excise duty for procurement from domestic source

FOREIGN TRADE POLICY

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Export Promotion Capital Goods (EPCG)

This scheme allows import of capital goods for pre production, production and post production at 3% Concessional Custom Duty, subject to an export obligation equivalent to 8 times of duty saved of capital goods under EPCG Scheme, to be fulfilled in 8 years. Import of motor cars, SUV’s/all purpose vehicles shall be allowed only to hotels, travel agents, tour operator operators and companies owning/operating golf resorts subject to

· Total Foreign Exchange earnings from Hotel, Travel & Tourism in current and preceding three licensing year is Rs. 1.5 crores

· Duty Saved amount on all EPCG Scheme shall not exceed 50% of average foreign exchange earnings from Hotel, Travel & Tourism in preceding three licensing years.

· Vehicles imported shall be so registered that the vehicle is used for tourist purpose only.

Export Obligation

· Export obligation shall be, over and above, the average level of exports achieved by applicant in preceding three licensing years for the same and similar products within the overall export obligation period. Such average would be the arithmetic mean of export performance in 3 years.

· Up to 50% Export obligation may also be fulfilled by exports of other good(s) manufactured or service(s) provided by the same firm/company, or group company/managed hotel which has EPCG Authorisation.

· Shipment under Advance Authorization, DFRC, DFIA, DEPB or Drawback scheme, or incentive schemes under Chapter 3 of FTP, would also count for fulfillment of EPCG export obligation.

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· It can also fulfilled by supply ITA-I items to DTA, provided realization is in free foreign exchange.

· Export shall be physical exports. However, deemed export as specified in FTP shall also count towards export obligations.

If you have any quires/clarification/feedback/anything then it will great to hear from you. Thank you

Nitin Pahilwani Chartered Accountant Email: ntpahilwani@yahoo.com / ntpahilwani@gmail.com http://in.linkedin.com/in/ntpahilwani

The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although I endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that will continue to accurate in future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.