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Have GST rate cuts made hotels affordable? Not really!

Experts believe that hotel operators are likely to increase room tariffs so that the outgo for customers remains in the same range as before the GST rate cuts

twitter-logoManu Kaushik | November 7, 2019 | Updated 17:02 IST
Have GST rate cuts made hotels affordable? Not really!

Hospitality sector is expecting an uptick in this financial year. The topline and bottomline of hotel companies are expected to improve in 2019-20 due to a variety of reasons - domestic leisure market looking up, reduction in GST (goods and services tax) rates, and higher spending on travel by millennials. As per the rating agency CARE Ratings, the industry is likely to register a revenue growth of 6-8 per cent in 2019-20, up from 3.5 per cent in 2018-19.

The net profit margins are also expected to jump to 6-6.5 per cent in the current financial year, up from 4.2 per cent in 2018/19. The outlook looks bright thanks to a steep cut in GST rates in September. Let's understand with an example. If a customer was paying Rs 8,000 for a room rate and Rs 2,240 as GST charges, the total outgo amounted to Rs 10,240 per day. After the revision of rates, the GST component has gone down by Rs 800 to Rs 1,440. Experts believe that hotel operators are likely to increase room tariffs to about Rs 8,800 so that the outgo for customers remains in the same range (Rs 10,384 per day), giving hotels an opportunity to pocket more profits. This is quite opposite to the intended purpose of the rate cut, that is, making hotel stays affordable for customers by way of lower room rates.

"There is a possibility that hotel companies may increase costs. If that happens, the customer outgo will remain the same," says Darshini Kansara, deputy manager (industry research) at CARE Ratings.

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The reduction in GST rates has come right at the beginning of the peak season (October to March) for the tourism sector. When GST was implemented in July 2017, taxation for the sector had risen from an average of 18 to 22 per cent to slabs of 5 to 28 per cent, but upscale segment saw an increase in the effective taxation. The rate cuts are likely to give fillip to two segments - mid-market (room rates above Rs 2,500 per day) and upscale (room rates above Rs 7,500 per day) where the rates have been slashed by 6 per cent and 10 per cent, respectively. Out of the total branded hotel rooms (1.33 lakh) in India across 1,068 hotel properties, 94 per cent falls under mid and upscale categories.

Although industry experts expect some transmission of rate cuts to consumers as well, they believe hotel companies will stand to gain more because the domestic leisure market looks robust at the moment. Since most indicators suggest that domestic passengers are expected to spend more over the next two years (2020 and 2021), hotel companies are confident that they can charge more.

"We are confident that room tariffs and RevPAR [revenue per available room] will grow in this financial year. GST rate cuts are going to play a vital role in improving revenues," says a promoter of a midscale hotel chain.

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"The reduction in GST rate cut has improved yields in competitive markets where the demand outpaces supply. In other markets, we have passed on the benefits to consumers reducing their rates marginally," says Vibhas Prasad, director at Leisure Hotels Group.

The inbound travel market is going to be weak, as the global economy is not doing well. But one of the main reasons to reduce GST rates was to improve the country's competitiveness and narrow the tax differential between India and neighbouring countries where the GST rates hover in the range of 7-8 per cent. Lower taxes could potentially help India draw back meeting, incentives, conference and exhibition (MICE) traffic where India has been losing out. In 2018-19, the foreign tourist arrival numbers grew by just 2 per cent to 10.6 million.

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