Luxury tax may send hotel rates spiralling

Hotel tariffs in the country during the coming busy season are all set to go up with various state governments planning to impose an additional luxury tax on hotels.

This comes at a time when the central government has called upon the hotel chains to refrain from raising their tariffs.

In states like Delhi, which already has a 12. 5 per cent luxury tax on hotels, the government is now planing to charge the tax on published rates instead of actual rates, which are lower.

Hotel chains said the move would inevitably result in tariff hikes as they were not in a position to absorb the additional cost and would have to pass on the burden to consumers, leading to an increase in average room tariffs.

For example, when a hotel with a published room rate of $300 offers a room to a consumer at $100, the effective tax the consumer pays will be 37.5 per cent instead of 12.5 per cent.

"The decision of state governments to impose additional luxury tax on hotels will lead to an increase in room rates. The Centre has been asking states to reduce the average tax on hotels," SSH Rehman, chairman of ITC Hotels, told Business Standard.

Besides, hotels and travel agents are likely to head towards another round of spat on bookings during this peak season also. It was pointed out by tour operators that during peak season hotels reject confirmed bookings pointing out unavailability of rooms.

Hotels point out that even tour operators do not realise the bookings and the average booking realisation by travel agents are only about 50 per cent.

"There have been issues regarding the room bookings and confirmation. We are working on solving this. The room rates are determined by market forces. Hotels are not jacking up the rates just for making quick profits," said Shyam Suri, secretary general, Federation of Hotel and Restaurant Association of India (FHRAI).

Hotel chains like ITC Hotels are looking at different solution to the issue. "Let the issue of honouring bookings be two way. There should be a commitment from the side of the tour operators also. If there is a failure in honouring the bookings a penalty should be paid," said Rehman adding that hotel chain will rework its agreements with the tour operators in this regard.

It was pointed out by hotel companies that they will not be in a position to accept the demand by the government to not to revise room charges upwards. Hotel companies say that the room rates have gone up as a result of shortage in room supplies and they can not be blamed for that.