It's Capital gains for hospitality industry
March 1, 2007

Although the five-year tax break on hotels, announced by finance minister P Chidambram in the Budget, comes with caveats, many hoteliers have stepped up their plans for the national capital region.

With a view to providing adequate number of hotel rooms for the 2010 Commonwealth Games, one-, two-, three- and four-star hotels in Delhi and surrounding territories of Gurgaon, Faridabad, Gautam Budh Nagar (NOIDA) and Ghaziabad have been given a tax break for five years.

However, this will be applicable only for those hotels constructed and made operational between March 31, 2007 and April 1, 2010. A tax break has also been granted to convention centres with capacity of more than 3,000 seats.

As the gestation period for hotels is normally three to four years, the tax break may not have the desired effect. “It would be more fruitful to initiate the tax break once the hotels start booking profits,” said Satya Poddar, partner, Ernst&Young.

Agreeing with this, a senior executive with The Leela said, “Any government concession invariably has a feel-good factor. Hotels typically take two-three years for construction, hence the real benefits of tax break will be enjoyed only for a shorter time.”

“The good news is that hoteliers will expedite the process of building and running hotels,” said Sanjay Verma, executive managing director-South Asia, Cushman & Wakefield.

The hotel industry is also not very happy about this move being restricted to only the National Capital Region. “Let us be clear on one thing. The FM has not done this with the idea of benefiting the hotel industry. It is only to address the shortage of 20,000 hotel rooms in the NCR for the Commonwealth Games. But at the end of the day, the country is facing a shortage of 1.1 lakh rooms,” said a hotelier.

It is this massive gap between demand and supply that is enabling hotels to increase their average room rates by almost 18-22 per cent annually.

According to estimates earlier provided by HVS International, a firm specialising in hotel valuation and consultancy, an investment of Rs 61,000 crore will be required to overcome the shortage of hotel rooms in the country.

Despite this, many hoteliers have have stepped up their plans for the NCR. Ginger Hotels, for instance, may go in for more than one hotel in Delhi and the NCR region. “We were already looking at the NCR region. FM’s incentive gives fillip to our decision,” says Prabhat Pani, CEO, Ginger Hotels.

Ginger Hotels recently bagged a contract to convert the Rail Yatri Niwas in Delhi’s Cannaught Circus. Others such as Lemon Tree Hotels, that runs two hotels in Gurgaon, is also looking to expand. Royal Orchid which already has hotels coming up in Delhi and Noida will avail of the tax break.