Luxury Tax in India

Luxury Tax is an indirect statutory tax imposed primarily on the services offered at hotels, spas, and resorts. It does not apply to food and beverages served at hotels and other locations.

What is Luxury Tax?

According to the Luxury Tax Act, ‘Luxury’ means a service or Commodity that is specified as ministering comfort, enjoyment or pleasure to a person’s life. Even though a person may not like a particular hotel or accommodation as per Luxury Tax Act and State Luxury Tax Rate, he/she has to pay the respective taxes involved.

The Indian tax administration has had challenges dealing with the concept of luxury for a long time. The introduction of Goods and Services Tax (GST) by the government has put “luxury items” in the highest tax bracket at 28%. Luxury by definition is hard to explain, it is subjective in nature. One person’s luxury can often be another person’s necessity.

Purpose of Luxury Tax

The introduction of Goods and Services Tax (GST) has brought about a significant transformation in the previous indirect tax structure, simplifying and streamlining the taxation system while eliminating multiple taxes. One notable change is the elimination of the need to file commercial taxes, including luxury tax, on a monthly or quarterly basis. Under the GST regime, the taxation process has become more organised and systematic.

Moreover, the new taxation system clearly defines products and services falling under the luxury category. These include hotels, restaurants, health clubs, spas, beauty parlours, swimming pools, and more. By categorizing these products and services, the GST system further clarifies the tax structure.

History of Luxury Tax in India

The luxury tax was introduced in India in 1996 as a means to generate revenue from the hospitality industry. Initially, the tax targeted luxury hotels and resorts that catered to high-net-worth individuals, specifically focusing on charges for hotel accommodation.

The implementation of the luxury tax was carried out by individual state governments, leading to variations in tax rates across different states. Some states opted for a fixed percentage of the room tariff, while others imposed a flat rate based on the hotel's star rating.

In 2009, the government introduced a uniform tax rate of 12.5% on hotel accommodation charges, replacing the earlier system of variable tax rates. This standardisation aimed to create a more consistent and simplified taxation structure.

Finally, in 2016, the luxury tax, along with other indirect taxes, was subsumed under the Goods and Services Tax (GST). This integration brought about a comprehensive overhaul of the taxation system, unifying various taxes under a single framework.

Luxury Tax Returns Filing

In India, the collection of Luxury Tax is generally overseen by the Commercial Taxes Department or the Excise Department in each state. These departments are further divided into specific departments, such as VAT, Service Tax, and Entertainment Tax, to effectively impose and collect Luxury Tax in an organised manner.

To fulfil their responsibilities, these departments have enhanced their functionalities and established independent websites and other channels in each state. These platforms enable residents to access the necessary forms and register their businesses or themselves for Luxury Tax payments. The registration process ensures that individuals or business owners can fulfil their obligations by paying the applicable luxury taxes.

After implementing the Goods and Services Tax (GST), several indirect taxes have been unified, simplifying the overall taxation process. Unlike the previous requirement of filing commercial taxes, including luxury taxes, on a monthly or quarterly basis, GST has introduced a standardised taxation procedure. The process and filing deadlines for GST are consistent across all industries throughout India. 

Luxury Tax Explained With an Example

Say Varun and his family go on vacation to a resort and stay there over the weekend. The hotel management will then have to provide the necessary services such as accommodation, food, and more. While vacating the resort, Varun will be charged a bill that includes luxury tax for facilities like the rooms but not on the food they provided.

Where is Luxury Tax Applicable?

Luxury Taxes are under the purview of almost all State Luxury Acts. Taking the State of Karnataka as an example, the following are applicable under Luxury Taxes.

• The services provided to the members of a club such as deposit, fee, donation or any other charges as mandated by the State
• The services provided by hotels for their residents
• Customers availing services at spas, beauty parlours, health club, swimming pool
• A hospital providing services more than Rs.1000 per day at 8% tax

Luxury Tax Rate

The tax on luxury goods and services can include but are not limited to only hotels, lodging houses, resorts or conference/ congregational halls. There are other clubs that have facilities within them to provide lodging that can also attract luxury tax.

Under the GST regime, the GST council has established different tax slabs for hotels and restaurants depending on their turnover and considering the criteria of air conditioning or non-air conditioning.

This now implies that consumers would have to pay more or less depending on the type of restaurant they are visiting, i.e., with an air conditioner or non-air conditioner. The tax rates at restaurants in a 5-star or 7-star hotel will be considerably higher, at 28 percent.

GST Tax rates on hotels based on room tariff (with effect from 1st October 2019) :

GST Tax rates on hotels based on room tariff (Upto 30th September 2019) :

Criticism of the Luxury Tax

The luxury tax, initially aimed at discouraging luxury consumption among the wealthy elite, has been criticized for being regressive and affecting the middle class, which also consumes luxury products or services.

Conclusion 

The luxury tax has been a significant government levy to regulate luxury item consumption and promote responsible spending. Although it is now incorporated within GST, its purpose remains intact, achieved through a higher tax rate. While the impact of GST on luxury tax has varied, it continues to generate substantial revenue for the government. Moreover, the luxury tax is crucial in fostering equitable wealth distribution in the country.