Tourism Ministry Moots Nationwide Hotel Tax Holiday

The tourism ministry has asked the finance ministry to extend a five-year tax holiday for two-, three- and four-star hotels to at least 35 other cities.

The tax break was proposed in the 2007-08 Union Budget for new hotels in the Delhi area so that a potential shortage of rooms during the 2010 Commonwealth Games could be averted.

The tourism ministry has requested that changes be made to the finance Bill that is yet to be cleared by Parliament. The Bill is a list of the tax changes proposed in the Budget.

“The tourism ministry can only recommend, but the decision is with the finance ministry,” notes Patu Keswani, who promotes the Lemon Tree brand of hotels and is planning to roll out a chain of budget hotels.

The list of cities includes those where airport facilities are being upgraded, such as Hyderabad, said a ministry official who did not wish to be named. The ministry’s goal is to alleviate an estimated shortage of 1.5 lakh rooms by reducing development costs for hoteliers, a long-standing demand of the industry.

The tourism ministry is pushing a number of proposals within the government, including the acquisition of a land bank from other government agencies to reduce hoteliers’ development costs and their time.

High land prices spurred by investments worth hundreds of millions of dollars by hotel companies are making it financially unfeasible for some developers to build budget hotels. For instance, Delhi-based developer Emaar-MGF Land Private Ltd, paid Rs388 crore last year for about five acres on the outskirts of South Delhi, or more than Rs77 crore per acre, to build a luxury hotel.

In a recent auction by the Indian Railways for a 30-year lease on a piece of land in Mumbai to build hotels where 25% of the rooms would be let out at budget rates, a company offered at least Rs168 crore, said P.K. Goel of the Indian Railway Catering and Tourism Corp. Ltd.

At such rates, most successful bidders won’t be able to afford to build budget hotels.

The tourism ministry has little leverage in getting even government land at discounted rates or to try and reduce taxes. According to the ministry, foreign arrivals in India increased 85.8% to 4.4 million in 2006, up from 2.4 million in 2002. The country received more than Rs29,600 crore in foreign exchange revenues from tourism in 2006, a gain of 17.6% over 2005.

With high occupancy rates induced by India’s room shortage, tariffs have shot up over recent years even among lower star categories.

According to a report by hospitality consultants HVS International, average room rates among three-star hotels grew 22.4% from fiscal 2004 to fiscal 2006, to Rs2,044 per night.