India: The Tourism and Hospitality Sector – 2017 The Year Gone By!!

Last Updated: 1 December 2017
Article by Vineet Aneja and Kaveri Kumar

The tourism and hospitality industry is moving at a fast pace and expanding in areas which were never explored before. India being a strong market for leisure and business segments, has set the ball rolling for Indian and foreign hospitality brands to tap into vibrant opportunities across all regions in India. As reported by India Brand Equity Foundation (IBEF), the numbers of Foreign Tourist Arrivals (FTAs) in April 2017 were 7.40 lakh as compared to FTAs of 5.99 lakh in April 2016 and 5.42 lakh in April, 2015. Several initiatives are taken by the Ministry of Tourism (MoT) to enlarge the scope of FTA's in varied tourism sectors such as medical and wellness, golf, adventure, cruise, rural and also to strengthen tourism in the North-Eastern region. Further, a strong middle class with disposable income and impetus on infrastructure projects has also laid down a concrete foundation for the advancement of the sector.

This year, several policy decisions and judicial pronouncements impacting the industry were implemented; we have set out below some of the key highlights of the year gone by and their effect on the tourism and hospitality sector:

Foreign Direct Investment (FDI) – As per the FDI Policy 2017 and subject to applicable laws, regulations, security and other conditionalities:

- 100% FDI is allowed on the automatic route in tourism and hospitality sector; and

- 100% FDI is allowed on the automatic route in tourism construction projects, including the development of hotels, resorts and recreational facilities.

As per the data provided by IBEF, tourism in India accounts for 9.6 per cent of the GDP and is the 3rd largest foreign exchange earner for the country. The facts and figures provided by the Department of Industrial Policy and Promotion also state that the hotel and tourism sector attracted US$ 10,477.29 of FDI Equity Inflow from April 2000 to June 2017, amounting to 3.06 of the total FDI equity inflow in India. Some of the eminent reported investments in the sector are stated below:

- MakeMyTrip (MMT) raised US$ 330 million from Ctrip.com International Ltd, Naspers Ltd and few undisclosed investors, in a bid to withstand competition in the ticketing segment;

- MMT has agreed to buy Ibibo Group's India travel business at a deal value of US$ 720 million, thus creating India's largest online travel firm with a value of US$ 1.8 billion;

- As per industry experts, the mid-hotel segment in India is expected to receive investments of Rs 6,600 crore (US$ 990 million) excluding land over next five years, with major hotel chains like Mariott, Carlson Rezidor and ITC planning to set up upscale, budget hotels in state capitals and tier-II cities.

Supreme Court's Ban on Selling Liquor on National and State Highways – The Hon'ble Supreme Court of India in its order dated December 15, 2016, in public interest prohibited the grant of licenses for sale of alcohol on national and state highways. Additionally, to strengthen the implementation of its order, the Supreme Court directed that no exception can be carved out for the grant of liquor licenses in respect of those stretches of the national or state highways which pass through the limits of any municipality corporation, city, town or local authority. Further, the order also stipulated the introduction of necessary safeguards to curb the visibility and accessibility of liquor vends falling within 500 meters from the outer edge of the highway, or from a service lane along a highway.

This order of the Hon'ble Supreme Court, though for a justified cause and in the right direction, caused a major setback to the industry, hitting many restaurants, hotels and liquor vends which due to their location were falling within the proximity of stretches of national or state highways passing through city limits or were within the 500 meters distance limit as stated in the order. The impact of this order was construed by the industry to not only take a toll on its revenue but also impact millions of individuals employed in these establishments, primarily within city limits.

Analyzing this situation, the Hon'ble Supreme Court through a subsequent order dated July 11, 2017 clarified that the directions contained in the order dated December 15, 2016 dealt with the sale of liquor along and in proximity of highways properly understood, which provide connectivity between cities, towns and villages. The order did not prohibit licensed establishments within municipal areas. The new clarification provided a big respite to the industry by lifting the ban within city limits.

Good and Services Tax (GST) – GST being crowned as one of the most significant reforms in the history of Indian economy, was a much welcome move; however, the reaction from the hospitality and tourism sector did not find many reasons to cheer. While fixing the initial tax rates ('Initial Rates') applicable to the sector, four different tax slabs were deduced by the GST Council which covered the following:

- Nil for hotels charging a tariff less than Rs 1,000 per day or equivalent;

- 12% for hotels charging a tariff of Rs 1,000 and above but less than Rs 2,500 per room per day;

- 18% for hotels with room tariff of Rs 2,500 and above and up to Rs 5,000 per day per room; and

- 28% for hotels with room tariff of Rs 5,000 and above per day per room

The complicated tax structure with multiple tax slabs required clarity. The lingering concern and confusion prompted the industry associations along with the MoT to approach the GST Council, to re-assess the tax slabs and make it more economically viable. Considering the concerns and the proposal put forth by the industry, the GST council revised the Initial Rates ('Revised Rates') as follows:

- applicability of the highest tax rate of 28% on room tariffs of Rs 5,000 and above, was revised to the increased room tariff rate of Rs 7,500 and above per day per room; and

- 18% GST on hotels charging room tariff of Rs 2,500 and above and less than Rs 7,500 per day per room.

The hotel industry appreciated the Revised Rates. As per industry projections, wider section of rooms tariffs could now be accommodated within the Revised Rates. However, the Revised Rates too have not convinced many in the industry, arguing that the highest rate of 28% GST charged on room tariffs of Rs. 7,500 and above will make it extremely difficult to compete in the global market and will severely impact the size share of hotels in the luxury category. Despite this discontentment, certain global brands are still very optimistic about their expansion in India and the tremendous potential the Indian market has to offer.

De-monetisation – In one of the most unexpected moves by the government, the decision of de-monetization hit the country by storm in November of 2016, the aftermath of which is still being grappled with by the sector. The impact certainly pulled the brakes on spending (usually through cash) in the unorganised sector, where it still seems to be recovering. The organized sector seems to be doing fairly better, where most of the bookings are generally made through digital platforms and the primary clientele usually are the corporates.

Air India's Disinvestment – The government in a much required thrust, has taken the initiative to go ahead with the disinvestment proposal of Air India (AI) including its subsidiaries and also intends to deliberate on the percentage of disinvestment. The privatization of AI is hailed by many in the industry as a welcome move to put an end to the heavy cost incurred on the exchequer and to better utilize taxpayers money.

Disinvestment of India Tourism Development Corporation (ITDC) Properties – The government in another reformative step initiated the process to disinvest the properties held by ITDC. The ITDC properties that are identified for this purpose are Hotel Lake View Ashok, Bhopal, Hotel Brahmaputra Ashok, Guwahati and Hotel Bharatpur Ashok, Bharatpur. As per the press release issued by the Press Information Bureau, it has been decided to lease/sub-lease the hotels/properties jointly with the concerned State or return the properties to the States, after fair valuation. The option of managing the properties through private operators or using the premises for a different purpose will be deliberated by the States once the properties are handed over. The principle under this disinvestment decision as stipulated by the government is that 'it is not the business of the government to run or manage hotels

This update is authored by Clasis Law, Clyde & Co's associated firm in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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