Don’t choke the hospitality sector

Generating over $200 billion in revenues and employing over 40 million people in 2016, the travel and tourism industry contributed almost 10 per cent to India’s GDP. Prime Minister Modi has repeatedly spoken about tourism being an intrinsic part of his vision. ‘Make in India’ and the provision for e-visas were steps in the right direction. One almost began to believe that the travel and tourism had finally begun to receive the attention it deserved.

But recent events, such as liquor ban on highways and some provisions in the GST suggest the hospitality business has been extended a second-fiddle treatment.

Hotel projects tend to be highly capital intensive, require a long gestation period and are frequently plagued by tribulations such as a very high cost of borrowing, relatively short repayment schedules as well as a maze of licenses, permits and approvals that are often marred by red-tapism and bureaucracy.

Hotel performances are instantly impacted by changing socio-economic and political factors and the business is inherently cyclical from a performance stand-point. The bravehearts who invest in this business aren’t necessarily signing up for an easy ride to begin with.

The recent liquor sale ban by the Supreme Court on all national and state highways, however well-intended, has ended up impacting free-standing restaurants and hotels as well. The impact of this is not limited to loss of revenue by way of liquor sales. It has caused a ripple effect on consumer choices from a lodging standpoint — the primary generator of revenue for hotels.

It’s a case of the presence of alcohol not necessarily aiding revenue enhancement, but its absence almost certainly harming the ability to attract guests. Hotel owners now must contend with an unforeseen environment that has made an immediate and significant impact on their ability to earn revenue and it will not be surprising to see more NPAs in the months ahead.

The matter of GST is now slated to further add to the sector’s woes. Hotels with a realised rate of ₹5,000 and above shall be required to levy 28 per cent GST on the bill. The argument is that this level of spend points to ‘luxury’. The hotel sector was traditionally marred with a variety of taxes and these varied from State to State. Luxury tax ranged from zero per cent in certain parts of the nation to 20 per cent of published tariff in others.

The chart ‘Tariff snapshot’ provides a comparison between the existing luxury tax rates across all the States to the GST rate of 28 per cent. If one were to put aside other costs (such as service charge, municipal tax, cess etc.), on an ‘apples to apples’ comparison, not a single state was levying such a high tax on its guests as will now be the case with this new tax regime. Figure 2 (‘Global cities room tax rate’) provides a quick comparison to the primary tax levied by prominent cities across the globe. Again, we are slated to be the most expensive.

The basic premise of creating slabs for hotels (No tax below ₹1,000, 12 per cent GST between ₹1,001 and ₹2,500 and 18 per cent GST between ₹2,501 and ₹5,000) is flawed. India has about 120,000 organised, branded hotel rooms. About 65 per cent of this inventory averaged a realised room rate of ₹5,000 or more in 2016.

Essentially, two-thirds of the branded supply in India is now left with no option but to brace itself for tough times ahead. Hotels may be forced to reduce their room rates in a bid to woo guests, who will most certainly not be keen on paying an extra 10 per cent to 16 per cent tax on their room rate.

Besides, treating the need for a lodging accommodation (a roof over your head when you are travelling) as a luxury doesn’t seem to make common sense. The Government’s inability to view the hotel sector as a provider of infrastructure rather a source of luxury is at the root of the issue. Over 70 per cent of hotel accommodation is presently consumed by corporate or business travellers. Hotel rooms are thus a “need” and not a “luxury”. Decisions such as these are matters of serious concern for the stakeholders in the hospitality business and one can only hope that the ‘powers to be’ shall realise that no good shall come out of breaking the camel’s back.

In conclusion, the hospitality sector has been displaying a steady growth in demand over the past 18 months and the next three to five years are expected to witness an overall up-cycle. However, considering recent decisions by both the judiciary and the Government, it almost seems like the sector will probably grow not because of the support provided by government, but in spite of it.

Khanna is managing director and Sahani is associate director at HVS South Asia