This report includes various regularity compliance specifically for Hotels/Hospitality like FDI, ECB, Various Taxation matters and benefits for Hotel/Hospitality in various Taxation Laws with recent updates, Foreign Trade policy and etc

1. HOTEL INN-DIA
NITIN PAHILWANI
CHARTERED ACCOUNTANT
MARCH, 2013

2. 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.