GENERAL INDUSTRY BACKGROUND

The hotel industry forms an integral part of the hospitality industry. The major fields within the hospitality industry include lodging, restaurants, event planning, theme parks, cruise line, etc. The hospitality industry is a multi-billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of various groups within it, including facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources.

The global hotel industry is a prosperous industry and according to a report published by New Industry Report by Global Industry Analysts, Inc. in 2012, the Global Hotel Industry is expected to reach USD 479 billion by 2015.1

As per the Economic Impact Report issued by the World Travel and Tourism Council, the direct contribution of travel and tourism to GDP worldwide in 2013 was USD 2,155.4 billion (2.9 % of GDP).2 Travel and tourism industry is expected to add more than 70 million jobs over the next decade, with two-thirds of those jobs to be created in Asia.3

In India alone, the total market size of the tourism and hospitality industry stood at USD 117.7 billion in 2011 and is anticipated to touch USD 418.9 billion by 2022.4 The success of the hotel industry in India is second only to China in the entire Asia Pacific5. Further, India is a developing global business hub which offers attractive investment propositions for both luxury and moderate-tier hotels.

India is projected to be number one for growth globally in the wellness tourism sector in the next five years, clocking over 20 % gains annually through 2017.6 With opportunities aplenty, the future of the hotel industry in India looks very promising.

IMPORTANT TRENDS IN THE INDUSTRY

  • The Indian hospitality sector falls within the spectrum of travel and tourism. The sector’s contribution to GDP is expected to grow at 7.8 % per annum during the period 2013-2023.7
  • 100 % FDI is permitted on the Indian hotel industry under the automatic route.8 Foreign Direct Investment in this sector has also seen a surge with the inflow during the period of April 2000–March 2014 being estimated at USD 7,348.09 million.9
  • Over the last few years, the hotel industry has observed a shift towards the budget and mid- market hotels. Renowned hotel companies have launched brands [eg. Ginger by Indian Hotels (IHCL)] catering to the budget and mid-market customers, who were thus far being served by the unorganized sector.10
  • Investment Information and Credit Rating Agency (ICRA) estimates 8-13 % growth in revenues for the industry over the next three years, with growth picking up in line with the macro-economic outlook for the country leading to mobilisation of travellers and pick up in FTAs.11
  • The Hotel Industry is intricately associated to the tourism industry and the growth in the Indian tourism industry has in turn resulted in development in the Indian Hotels Industry. The Government of India increased resources on advertising campaigns like “Incredible India” and “Athithi Devo Bhava” to emphasize the rich variety of tourism in India.
  • The ministry even granted Tourist Visa on Arrival for the citizens of a number of countries including, Finland, Japan, Luxembourg, New Zealand and Singapore. The tourism ministry has envisaged a budgetary allocation of INR 200 billion in the Twelfth Five Year Plan.12
  • According to market analysis, the number of tourists availing the tourist Visa on Arrival (VOA) scheme during January- June 2014 has recorded a growth of 28.1 %.13
  • According to World Economic Forum Travel & Tourism Competitiveness Report 2013, India ranked 65th out of 144 countries in terms of Foreign Tourist Arrivals (FTAs)14 The WTO (World Travel Organization) predicts that India will receive 25 million tourists by the year 2015.15 information/areas-of-service/industry/hotels.html#c434 By 2015, China and India will have absolute year on year growth equal to or greater than the UK, France or Japan.16
  • The hospitality sector in India expects 52,000 new hotel rooms to be added in five years (2013-17). This will lead to a rise of over 65 % in total hotel inventory in India.17
  • The demand-supply gap in India is very material and there is need for more hotels in all major cities. The shortage is especially acute within the budget and the mid- market segment.
  • Talent management is a major challenge for the sector. Inadequate supply of quality talent and increased competition for talent within the sector and from competing service sectors has made attrition a significant issue for the industry.18
  • In the near term, despite an anticipated revival in room demand, hotels will not be able to hike ARRs significantly as the expected additions to room inventory will intensify competition.19

MAJOR PLAYERS IN INDIA

Leading Indian Players

  • In the large/ luxury hotels segment there are about 11 long-standing players such as ITC Hotels, Asian Hotels, the Oberoi Group of Hotels, Hotel Leela Ventures, ITCD, Indian Hotels, the Park Hotels, Taj Group, Inter Continental, Welcome Heritage Group of Hotels, etc.20
  • In addition there are about 90 listed hotels and resorts in the small/mid-sized segment including Country Club, EIH Associate Hotels, Kamat Hotels and Mahindra Holidays and Resorts.21

Leading International Players in India

  • Major International Players are: Hilton Hotels, Marriot International, Le Meridien Group of Hotels and Resorts, Radisson Hotels and Resorts, Hyatt Hotels Corporation, Starwood Hotels, Accor Group, Best Western Group, etc.22

Important Industry Associations

The major industry associations are:

  • The Federation of Hotel & Restaurant Associations of India (FHRA);
  • The Hotel & Restaurant Association of Eastern India (HRAEI);
  • The Hotel & Restaurant Association of Northern India (HRANI);
  • The Southern India Hotel & Restaurant Association (SIHRA);
  • The Hotel & Restaurant Association (Western India) (HRAWI); and
  • Hotels Association of India (HAI);

IMPORTANT LAWS APPLICABLE TO THE INDUSTRY

The majority of the legislations governing the hospitality and hotels industry can be divided into three main sectors.

  • The first head is the legislation for the construction and commissioning of hotels, restaurants, guest houses and other establishments, and includes the Foreign Exchange Management Act, the industrial licensing policies, land laws and various development control orders issued by the central and state governments.
  • The second head has legislation for the operation, maintenance and management of establishments, food and hygiene standards. It also includes insurance laws, fire safety and weights and measures regulation. Further, various licenses, such as a liquor license, dance license, lodging house license, eating house license, police permissions, a license under the Shops and Establishment Act, or a license under the Food and Drug Administration Act, granted on an annual basis.
  • The third head has rules regarding taxation, employment and other contractual relationships. This includes laws on income tax, service tax, expenditure tax, excise duty, luxury tax, entertainment tax, as well as laws on employment matters like Apprentice Act, ESI Act, etc.

SOME OF THE IMPORTANT LICENSES REQUIRED BY HOTELS UNDER VARIOUS ACTS

  • Police License / Registration.
  • License under Shops & Establishments Act.
  • License under Prevention of Food Adulteration Act.
  • Registration under the Luxury Tax Act.
  • Registration under the Sales Tax Act.
  • Registration under the Contract Labour Act.
  • Registration under the Pollution Control Act.
  • Registration under the Apprentices Act.
  • Registration under the Provident Fund Act.
  • Registration under the ESI Act.
  • Entertainment License on Festival Occasions.
  • License for Chimney under the Smoke Nuisance Act.
  • Registration under the Weights & Measures Act.
  • Factory License for Laundry.
  • Central Excise License for Bakery Products.
  • Registration & Permits under the Motor Vehicle Act for Tourist Coaches / Taxies.
  • Eating House License.
  • Municipal Beer Bar License.
  • License for storage of Diesel Oil.
  • License for storage of Kerosene & Compressed Gas (LPG).
  • Sign Board Directions, Neon Signs.
  • License to deal in Foreign Exchange under FEMA.
  • Cold Storage License, (if over 25 cubic ft.).
  • License for Boiler & Generators and Mixers and Grinders.
  • Bar License (Foreign Liquor).
  • Mild Liquor License.
  • Temporary License for Awnings & covering of Terrace during monsoon.
  • Building Completion Certificate.
  • Copy Right License for Playing of Music.
  • Lodging House License
  • Approval from the Department of Tourism, Government of India.
  • Registration from GTDC for new projects under the Package Scheme of Incentives.

SOME IMPORTANT LEGISLATION

Prevention of Food Adulteration Act

  • It is a Central Government Act.
  • This Act has been enacted to
  • 1. protect the public from poisonous and harmful foods.

    2. prevent the sale of substandard foods.

    3. protect the interests of the consumers by eliminating fraudulent practices.

Food Safety and Standards Act

The Act deals with the following:

  • Establishment of the Food Safety and Standards Authority of India, which lays down scientific standards relating to articles of food; and
  • Regulates the manufacture, storage, distribution, sale and import of food articles, and
  • Ensuring the availability of safe and wholesome food for human consumption and for matters connected therewith or incidental thereto.

The Legal Metrology Act

  • This Act was enacted to establish and enforce standards of weights and measures, regulate trade and commerce in weights, measures and other goods which are sold or distributed on weight, measure or number.
  • It is a Central Government Legislation.

Copyrights Act

  • It is a Central Legislation to protect rights relating to literary, dramatic, musical, artistic, architectural works, etc.
  • Hotels have to take license under this Act to organize plays, musical shows or any other event.

The Foreign Exchange Management Act (FEMA)

  • It is an Act passed in the winter session of Parliament in 1999
  • It replaced Foreign Exchange Regulation Act.
  • This act seeks to make offenses related to foreign exchange civil offenses.
  • It extends to the whole of India.

The State specific Shops and Establishments statutes

  • These legislations have been enacted to provide statutory obligation and rights to employees and employers in the unorganized sector of employment, i.e. shops and establishments. It is applicable to all persons employed in an establishment with or without wages, except the members of the employer's family.
  • It is a State legislation and each State has framed its own rules for the Act. The State Government can exempt, either permanently or for a specified period, any establishments from all or any provisions of this Act.
  • The Act provides for compulsory registration of shop/ establishment within 30 days of commencement of work and all communications of closure of an establishment within 15 days from its closing.
  • It also lays down the hours of work per day and week as well as the guidelines for spread-over, rest interval, opening and closing hours, closed days, national and religious holidays, overtime work, etc.

The Employees State Insurance Act

  • It is a Central Government legislation
  • The promulgation of Employees' State Insurance Act, 1948 envisaged an integrated need based social insurance scheme that would protect the interest of workers in contingencies such as sickness, maternity, temporary or permanent physical disablement, death due to employment injury resulting in the loss of wages or earning capacity.
  • The Act also guarantees reasonably good medical care to workers and their immediate dependents.
  • Following the promulgation of the ESI Act the Central Government set up the ESI Corporation to administer the Scheme.

The Provident Funds Act

  • It is a Central Government Legislation.
  • It is regulated by the Government of India under the Ministry of Labour and Employment.
  • It administers a compulsory contributory Provident Fund Scheme.

The Apprentices Act

  • This Act has been enacted to provide for the regulation and control of training of apprentices and for matters connected therewith.
  • It is a Central Government Legislation

The Air (Prevention and Control of Pollution) Act, 1981

  • This Act has been enacted to provide for the prevention, control and abatement of air pollution, for the establishment, with a view to carrying out the aforesaid purposes, of Boards, for conferring on and assigning to such Boards, the powers and functions relating thereto and for matters connected therewith.
  • It is a Central Government Legislation

The Water (Prevention and Control of Pollution) Act, 1974

  • This Act has been enacted to provide for the prevention and control of water pollution and the maintaining or restoring of wholesomeness of water, for the establishment, with a view to carrying out the purposes aforesaid, of Boards for the prevention and control of water pollution, for conferring on and assigning to such Boards, the powers and functions relating thereto and for matters connected therewith.
  • It is a Central Government legislation

Hotel Insurance Policies

  • Hotel insurance is specifically designed to meet the growing requirements of the hotel industry.
  • Customized hotel insurance can be arranged to cover all types of establishments. Be it spas, ranches, guest houses, bed and breakfasts (B and Bs) or apartments, hotel insurance caters to every kind of establishment.
  • A standard hotel insurance policy includes protection against perils, such as builder's risk, fire and accidental damage, and natural calamities. Other types of coverage, such as liquor liability, are a part of the policy's casualty portion.

Other important Legislations

  • Laws related to local land norms
  • Other local laws

TAX LAWS

Income Tax Act, 1961

  • It is tax on income imposed by Central Government
  • Residents in India are taxed on their worldwide income
  • Non- residents are taxed on Indian source of income
  • The Indian tax rates applicable to non-residents could be up to a maximum of 40 % i.e. in case of foreign companies (excluding applicable surcharge and education cess)
  • If the tax payable by any company, including a foreign company taxable in India, is less than 18.5 % of its book profits, it will be required to pay Minimum Alternate Tax
  • Interest received by a non-resident from Indian on foreign currency denominated loans may be taxable.
  • Payments towards royalty and fees for technical services are taxable.

Value Added Tax (VAT)

  • Sales tax / VAT is levied by states on sale of goods within its territory.
  • VAT is levied on value added at each stage in the production and distribution process of goods and services.
  • All hotels that exceed the annual registration threshold have to be registered for VAT.
  • VAT is levied on hotel bills pertaining to lodging, food, telephone, tours, etc.
  • After the implementation of VAT, hotel tax is abolished and therefore hotels do not have to be registered for hotel tax.
  • The rates of VAT differ from state to state. The general rate of VAT applicable on food and beverages in a restaurant is 14.5 %.

CENVAT

  • Duty imposed by Central Government on manufacture of goods
  • CENVAT is imposed at 12 % with lower rates applicable in certain cases
  • Food preparations containing fruits and vegetables falling under Chapter 20, which are prepared and served in a hotel, restaurant or retail outlet whether or not such food is consumed in such hotel, restaurant or retail outlet is being fully exempted from basic excise duty with exception of Bakery and Confectionery items.

Service Tax

  • Under the current service tax regime, all services are taxable unless exempt.
  • General rate of service tax is 12.36 % (Including EC and SHEC)
  • Service tax on hotel accommodation is payable at 7.42 %. Service tax on food and beverages is chargeable at 4.94 % in restaurants with air-conditioning.
  • Food served in hotel rooms from their air-conditioned restaurants with liquor license will not attract service tax.
  • CENVAT Credit is available for the provider of taxable output services.

Luxury Tax

  • Under the current tax regime, every state has their individual Luxury Tax Acts.
  • Though previously it covered more categories of assessees, at present it covers only the hotels as a taxable assessee.
  • The tax is levied on luxuries provided in hotels, lodging house, clubs and inns etc. including residential accommodation but does not include the supply of food, drinks or other services which is separately charged for under Service Tax or other taxes.

Entertainment/Amusement Tax

  • In India, entertainment tax is levied on every financial transaction that is related to entertainment such as movie tickets, major commercial shows and big private festivals. Entertainment means any exhibition, performance, amusement, game, sport or race, (including horse race) and cinematographic exhibitions.
  • As per the Indian Constitution, entertainment is included in List 2. This revenue is reserved primarily for the state governments.
  • Following are some other forms of entertainment that are included in the purview of entertainment taxes: amusement parks, video games, arcades, exhibitions, celebrity stage shows, sports activities, bowling alleys and billiards/pool joints.
  • In India, state governments are primarily responsible for collecting the entertainment taxes. However, the union government can also collect these taxes on the basis of the type of transaction.
  • The basic financial principle, which separates the entertainment taxes to be collected by the union government and ones under the jurisdiction of the state government, is mentioned in the Article 246 of the Indian constitution.

Expenditure Tax

  • Expenditure tax in India is regulated by the Expenditure Tax Act, 1987.
  • This Act shall apply in relation to any chargeable expenditure incurred in a hotel wherein the room charges for any unit of residential accommodation at the time of incurring of such expenditure or incurred in a restaurant are one thousand two hundred rupees or more per day per individual and where,-- (a) a composite charge is payable in respect of such unit and food, the room charges included therein shall be determined in the prescribed manner; (b) (i) a composite charge is payable in respect of such unit, food, drinks and other services, or any of them, and the case is not covered by the provisions of sub-clause (a), or (ii) it appears to the Assessing Officer that the charges for such unit, food, drinks or other services are so arranged that the room charges are understated and the other charges are overstated; and (2) incurred in a restaurant.
  • Rate of tax is 20 %
  • It is a tax collected by the Central Government.

REGULATORY AGENCIES

The Hotel and Restaurant Approval and Classification Committee (HRACC)

  • It inspects and assesses establishments based on the facilities and services offered.
  • The Department of Tourism grants star status based on how well the establishment scores in the HRACC report: 90 % = five-star deluxe; 80 % = five star; 75 % = four star; 65 % = three star; 55 % = two star; and 50 % = one star.
  • Food Authority assesses matters relating to the Food Safety and Standards Act, 2006:To regulate and monitor the manufacture, processing distribution, sale and import of food so as to ensure safe and wholesome food.
  • The Federation of Hotel & Restaurant Associations of India – FHRAI is also a regulating authority.
  • The Ministry of Tourism is the nodal authority and, along with the Department of Tourism, it is responsible for policies, promotion & regulation of hospitality industry, particularly hotels.

The following are the some of the important guidelines issued by the Department of Tourism.

  • Approval of Hotels at Project Stage and Classification & Reclassification of Hotels.
  • Guidelines for Classification of Heritage Hotels.
  • Time Share Resorts (TSR).
  • Stand Alone Restaurants
  • Guidelines for apartment hotels.
  • Guidelines for approval of Guest Houses.
  • Hospitality Development and Promotion Board
  • Implementing a transparent system for the effective monitoring of hotel projects.
  • Ensure timely accrual of approvals / clearances / NOCs by the multiple agencies and facilitate the implementation of hotel projects.
  • Expeditious clearances will enable completion of hotel projects in time leading to enhancement of room availability for the tourists.

CONCLUSION

The future for the hospitality sector looks very promising. With the growth of the economic scenario gathering momentum and companies increase spending on travel, demand for the industry is very likely to improve. With salary increases within the corporate world, leisure travel and disposable income are likely to be on the rise.

Further, the number of foreign tourists coming to India is expected to reach USD 11.1 m by 202123. The demand-supply gap in India is very acute and there is need for more hotels in all major cities. The shortage is especially palpable within the budget and the mid- market segment. There is an urgent need for budget and mid- market hotels in the country as travelers look for safe and affordable accommodation.

The Indian hotel industry is expanding at a massive rate, with several companies envisaging investment plans. Investment in Travel & Tourism is estimated at INR. 2.8 trillion by 2021 (implying a CAGR of 8.7 %), according to World Travel and Tourism Committee (WTCC) estimates.24

Demand continues to rise in the hospitality sector due to growing business and commercial activities; escalation of disposable income; the improved portfolio of the international tourism sector; increased leisure time; improved transport facilities; and technological advancements facilitating remote tour management from overseas.

However, due to the cash crunch and high interest rates and the sector being highly dependent on external factors, the investors and hotel groups are approaching fresh expansion projects with caution.

To solve these issues and to do away with the constraints being faced by the hotel industry in addition to limited availability of land like procurement of multiple clearances / approvals which are required from the Central and State Government agencies for hotel projects which may be as many as 65 or more clearances/approvals are required by hotel projects which varying from State to State, the Government has approved the setting up of a 'Hospitality Development and Promotion Board (HDPB)' for hotel projects.25 Further, the government has extended its full support to the hospitality industry by introducing friendly legislation, a liberal policy framework, and support infrastructure and open-sky policies.

All in all, great progress can be hoped for the Hotel Industry in India in the recent future with both the Government and Private sector working towards the massive expansion of the industry.


1 Global Industry Analysts, Inc., New Industry Report, available at http://news.yahoo.com/global-hotel-industry-reach-us-479-billion-2015-140027246.html

2 World Travel and Tourism Council, Economic Impact Report, 2014;

3 Deloitte 2014 Outlook on Travel, Hospitality and Leisure, available at http://www.deloitte.com/view/en_US/us/Industries/travel-hospitality-leisure/38b4fa3b5791b310VgnVCM2000003356f70aRCRD.htm#.U_HWv_noRz8;

4 India Brand Equity Foundation: Tourism and Hospitality Industry in India, available at http://www.ibef.org/industry/tourism-hospitality-india.aspx;

5 Hotels in India, available at http://www.tphtours.com/tphtours-page/pages/showexpages/1/hotels-in-india.html

6 India Brand Equity Foundation: Tourism and Hospitality Industry in India : According to a study conducted by SRI International, available at http://www.ibef.org/industry/tourism-hospitality-india.aspx

7 India Brand Equity Foundation: Tourism and Hospitality Industry in India: available at http://www.ibef.org/industry/tourism-hospitality-india.aspx

8 Foreign Direct Investment Policy, 2014, available at http://dipp.nic.in/English/Policies/FDI_Circular_2014.pdf;

9 India Brand Equity Foundation: Tourism and Hospitality Industry in India : As per the data released by Department of Industrial Policy and Promotion (DIPP), available at http://www.ibef.org/industry/tourism-hospitality-india.aspx

10 Hotels Sector Analysis Report, available at http://www.equitymaster.com/research-it/sector-info/hotels/Hotels-Sector-Analysis-Report.asp

11 Indian Hotel Industry Report 2013- ICRA, available at http://www.icra.in/AllTypesOfReports.aspx?ReportCategory=Hotels

12 Report of the Working Group of Tourism, Ministry of Tourism, Government of India (2012- 2017), available at http://planningcommission.nic.in/aboutus/committee/wrkgrp12/wgrep_tourism.pdf

13 India Brand Equity Foundation: Tourism and Hospitality Industry in India, available at http://www.ibef.org/industry/tourism-hospitality-india.aspx

14 Indian Hotel Industry Report 2013- ICRA available at http://www.icra.in/AllTypesOfReports.aspx?ReportCategory=Hotels

15 The Growing Indian Hospitality Industry, available at http://www.hostsindia.in/index.php?option=com_content&task=view&id=18&Itemid=32

16 Hotels Sector Analysis Report, available at http://www.equitymaster.com/research-it/sector-info/hotels/Hotels-Sector-Analysis-Report.asp

17 India Brand Equity Foundation: Tourism and Hospitality Industry in India: available at http://www.ibef.org/industry/tourism-hospitality-india.aspx

18 Indian hospitality: the industry, regulations and incentives (January 2008), available at http://www.singhania.com/Publication/IHL156_india-B.pdf

19 Ibid.

20 Tourism in India, available at http://www.tourism.gov.in/writereaddata/Uploaded/Guideline/101220110139668.pdf

21 Ibid.

22 Indian Hotels Industry, Quarterly Review, available at http://www.icra.in/Files/ticker/Indian%20Hotels%20Industry%2030032012.pdf

23 Hotels Sector Analysis Report, available at http://www.equitymaster.com/research-it/sector-info/hotels/Hotels-Sector-Analysis-Report.asp

24 Ibid.

25 Hospitality Development and Promotion Board (HDPB), available at http://www.tourism.gov.in/writereaddata/CMSPagePicture/file/Hotel/HDPB.pdf

Mission and Vision


Distinctly Different


Webinars

Bilateral Investment Claims against India: The Antrix Devas Saga decoded
October 25, 2016

This event is over. For event material please click here


Seminar

Lifecycle of India Focused Funds
June 08, 2017

This event is over. For event material please click here


Round Table

Interpretation of Contracts - The English view
September 19, 2017

Want to work with us?


HIRING Now!!

Inviting Top Talent for our Corporate, Funds and International Tax Practices

Strong credentials in Corporate Law (in particular M&A or Fund Investment), Fund Formation or International Tax? Now’s the time to apply. We’re looking for the industry's best talent with scope to do extraordinary work for the world’s best, marquee clients. Reach out for a great career in a great place!

Write to happiness(at)nishithdesai.com


TO LEARN MORE ABOUT US

CLICK HERE.


Nishith Desai Associates 2013. All rights reserved.