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GST could put luxury hotels in a soup unless travellers pay more

LiveMint logoLiveMint 16-06-2017 Vatsala Kamat

Luxury hotels will have to contend with higher tax rates as the new goods and services tax (GST) takes effect on 1 July.

To be sure, the shift from various state taxes levied under the present regime to a more uniform structure is good. Hotels will now be classified into four buckets based on tariff bands and taxed at 5%, 12%, 18% and 28%. Premium and luxury hotels, where room tariffs exceed Rs5,000 per day would be slapped with a 28% GST, a straight jump from what added up to 18-25%.

In the listed universe, properties owned by The Indian Hotels Co. Ltd, EIH Ltd, Hotel Leela Venture Ltd, Taj GVK Hotels Ltd and Kamat Hotels (India) Ltd, all come under the luxury category. So, higher tax rates would leave the hotels with little choice than to increase room tariffs.

The decision could hinge on demand. The shift to GST has come at a time when the profit and loss accounts of hotels had just brought some cheer for investors, after almost five years of a severe downturn. For instance, EIH’s revenue grew by a mere 5% year-on-year between FY2011 and FY2017. It was the same case with other luxury hotels too, with overcapacity of rooms hurting occupancy rates.

However, with time and with room additions coming to a standstill and a gradual improvement in travel, the supply overhang reduced. The March quarter’s average occupancy rates on a pan-India basis inched up by one percentage point to 78% for business destinations, from a year back. It rose by a similar magnitude to 77% for luxury. However, the average room rate (ARR) is yet to gather momentum, with only leisure destinations showing respectable growth rates over the last 12-18 months.

In fact, since October, the Street has acknowledged the improving performance of the sector. Barring IHCL that fell by 1.5% between October and now, due to the Tata-Mistry spat, most hotel stocks have galloped by 20-30%.

The other option is for hotels to absorb higher taxes and take a hit on profit margins. Even if hotels raise the room rates, it would take some time to get the input tax credit. This means higher working capital needs and interest charges that can take a toll on profits. Hotels like Hotel Leela Venture and EIH are already burdened with high interest costs on account of borrowings.

Having seen an improvement in the last few months, luxury hotels may be cautious in their approach in the near term in order to sustain occupancy rates. Even dining in five-star hotels would incur the 28% GST. That should be reflected in their stocks.

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