With a consistently growing middle class and increasing disposable income, the tourism and hospitality sector is witnessing a healthy growth and accounts for 7.5 per cent of the country's GDP. According to a report by KPMG, the hospitality sector in India is expected to grow at 16.1 per cent CAGR to reach Rs 2,796.9 thousand crore in 2022.The hospitality sector encompasses a wide variety of activities within the services sector and is a major job provider both direct and indirectly. The sector attracts the most FDI (Foreign Direct Investment) inflow and is the most important net foreign exchange earners for the country. It also contributes significantly to indirect tax revenue at the state and central level which includes revenues from VAT, Service Tax, and Luxury Tax etc.
The growth in the hospitality sector and its contributions to the GDP will continue to be substantially higher than other sectors of the economy on the back of huge tourism potential in the country. However, the hospitality sector is one of the most heavily taxed industries and is saddled with multiple layers of tax such as VAT, service tax, luxury tax, etc. ranging from 20 per cent - 30 per cent. This multiple taxations adds to operational costs and reduces profitability. While the operationalization of the much awaited GST regime is expected to rationalise the taxation structure, bring a positive outcome with streamlined taxes, enhance ease of doing business and lower cost for the consumers, there is an urgent need for lowering the tax levied, to incentivize and attract more investments to the sector.
Infrastructure development is the backbone and key to the growth of the hospitality sector. Taxes on real estate development for the hospitality sector must be lowered to boost investments as there is an acute shortage of good quality accommodation in the country. Secondly, the industry has been clamouring for industry status for over two decades. Providing industry status to the hospitality sector will go a long way in attracting investment and development of the sector. With India projected to be the fastest-growing nation in the wellness tourism sector in the next five years, at over 20 per cent gains annually through 2017 (SRI International), infrastructure development becomes critical in order to support this growth.
The government must also look at incentivizing investment in the development of luxury and ultra-luxury projects which will provide impetus to the hospitality and travel sector in India. The government should also provide service tax exemption for new developments and a longer tax holiday for new hotels and resorts that will help in attracting investments into the industry. Also, the tax rate for the sector needs to be lowered from the proposed 18% tax slab under consideration for the new GST regime.
The hospitality industry relies on a host of enabling the ecosystem to function and has a reciprocal relationship with several other sectors like transportation, entertainment, aviation etc. Strengthening these related sectors will lead to the growth and development of the hospitality sector. Therefore, single window clearance for real estate and hospitality projects and providing infrastructure status to the hospitality industry are much-needed steps for the growth of the industry.
The hospitality sector has the potential to be the main driving force behind the growth of the economy. It, however, will be possible only with the right amount of support and incentives from the government in all categories of hotels and not only limited to the luxury and ultra-luxury segment. I believe that the government must provide its full support in incentivizing the sector and the overall taxation on the hospitality sector should be reduced to stimulate its growth and make India competitive against other internationally renowned hospitality chains.