Luxury Tax in India

Luxury Tax is an indirect statutory tax, imposed primarily on the services offered at hotels, spas and resorts. It is not applicable for 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 persons 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.

Luxury Tax in India must now be paid by the last day of the month following the assessment month, ensuring a streamlined timeline for tax payments. This has contributed to the overall efficiency of the taxation process.

Moreover, the new taxation system provides clear definitions for 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 brings further clarity to 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. For Luxury Tax, the payment must be made by the last day of the month following the assessment month, per the GST guidelines.

Luxury Tax Explained With an Example

Say, Varun and his family go on a vacation to a resort and stayed 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 was under the purview of almost all State Luxury Acts. Taking the example of the State of Karnataka, the following are applicable under Luxury Tax.

• 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 having 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 airconditioned or non-airconditioned.

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

Here is a list of Luxury Tax rates on hotels:

Tax rates that hotels incur:

• Restaurants with a turnover of less than Rs 50 lakh will be imposed a tax rate of 5 per cent.
• Non-ac restaurants will have a tax imposition of 12%.
• AC restaurants will incur 18% tax.
• Five-star restaurants will have to impose a luxury tax of 28 per cent.
• Hotels, lodges and clubs having tariffs rates less than Rs 1,000 will be taxed at 5%.
• Hotel, lodges and clubs with tariffs between Rs 1,000- Rs 2,500 will be taxed at 12%
• Hotel, lodges and clubs with tariffs between Rs 2,500- Rs 5,000 will be taxed at 18%.

Criticism of the Luxury Tax

The luxury tax, initially aimed at discouraging luxury consumption among the wealthy elite, has faced criticism for being regressive and affecting the middle class, who also consume 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.

FAQs

Are luxury tax and income tax different?

Yes. The luxury tax is an indirect tax imposed on specific luxury items, while income tax is a direct tax levied on individuals' earnings. The luxury tax applies uniformly to everyone and is considered regressive, whereas income tax follows a progressive tax structure, with higher rates for higher incomes.

Does one need to register separately for the luxury goods or services supplied under GST?

No. There is no need for separate registration. But the nature of the products or services you deal with should be mentioned while applying for GST registration.

How is GST levied on luxury goods or services?

Under the GST Law, luxury goods or services are not defined separately. Instead, the law imposes a higher tax rate on items that were previously subject to a luxury tax, along with the addition of a GST compensation cess. For instance, luxury cars attract the highest GST rate of 28% along with a GST compensation cess.

Will the luxury tax be the same for all consumers?

Yes. The luxury tax is an indirect tax that is applicable only when individuals purchase luxury goods or avail themselves of luxury services. It is considered regressive because it applies uniformly to all consumers regardless of their income level. The tax is specifically targeted at luxury items and services to discourage excessive consumption in this category.

How is wealth tax different from luxury tax?

Wealth tax targets an individual's or company's net wealth, aiming to reduce income inequality. Luxury tax, on the other hand, applies to specific luxury goods and services, generating revenue and discouraging non-essential consumption. In India, wealth tax has been abolished, and luxury tax is now included in the Goods and Services Tax (GST) system, streamlining the taxation process and ensuring uniformity.

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