Investment&SecuritiesLaw Submission
Investment&SecuritiesLaw Submission
Investment&SecuritiesLaw Submission
6. Conclusion
1. Tourism Industry in India
With a view to stimulate domestic and international investments in this sector, the government
has permitted 100 percent FDI in the automatic route –allowing full FDI into all construction
development projects including construction of hotels and resorts, recreational facilities, and
city and regional level infrastructure. 100 percent FDI is now allowed in all airport expansion
projects subject to the condition that FDI for up gradation of existing airports requires Foreign
Investment Promotion Board (FIPB) approval beyond 74 percent.2
Foreign tourist arrivals are expected to grow to 10 million by 2010-12 and the domestic tourism
is expected to increase by 15% to 20% over the next five years as per the Ministry of Tourism
expectations basing on the growth in the last one decade. There is a rapid growth in average
room rates and is expected to continue until sufficient new supply come on stream (average
increase is 21% since 2004-06 in 4- & 5-star segment).
Government of India is allowing 100% FDI in Hotels and Tourism, through the automatic route
and identified the investment opportunity of about $8-10 billion in the next 5 years in
tourism sector. India has significant potential for becoming a major global tourist destination. 3
1Akhilesh Sharma, Amar Johri and Ajay Chauhan, ‘FDI: An Instrument of Economic Growth &
Development in Tourism Industry’ <http://www.ijsrp.org/research-paper-1012/ijsrp-p10103.pdf>
2Batra G.S., Tourism in the 21st century, (1996) Anmol publications Pvt. Ltd.,.245 Pgs
3 Federation of Hotels & Restaurants Association of India ltd, www.fhrai.com.
It is estimated there is a need of around 10 Billion US $ required for development of tourism as
per the different state tourism estimates for the next five years. When you think about the long
term capital requirement of all states, it is estimated around 56 billion US $ for the next 20
years.Tourism is no longer looking at it as a leisure activity, but as a major source of
employment4.
Multiplicity of Taxes:-
Indian tax structure is the highest tax structure in the Asia Pacific region. Central and state taxes
are mandatorily imposed on the traders.
Expenditure tax- 10%
States levy luxury tax- 5-25% on the hotel tariff
Heavy administrative costs of collection of HET by Central Govt. and Luxury Tax by State Govt.
the net benefit to the economy is considerably smaller and is not compatible with the loss in
revenue accruing due to diversion of tourists to lesser-taxed destinations.
Union Budget 2002-03- increase in threshold limit5. The revenue stream that the Union
Government shall have to forego on abolishing Expenditure Tax would not be substantial, and
would be more than matched by the benefits that could accrue from the increased flow of tourists
who are currently diverted to other less taxed destinations6.
High Taxes:
Multiplicity at central and state level leads to higher tax liability which further leads to increased
cost to the tourists. . A comparison of the Corporate Tax level in India, which affects the
hospitality sector, in comparison with our neighbors, shows India’s poor competitive positioning.
Service Tax on Tour Operators:
The services provided by a tour operator typically includes a wide range of services
coveringtransportation, boarding and lodging arrangements, local sight-seeing and guide
services, etc. which areprocured through sub-agencies. Even though 60% abatement is provided,
taxation of the gross serviceamount leads to double taxation and increases the burden for the
tourists.
The labor capital ratio per million rupees of investment at 1985-86 prices in the tourism sector is
47.5 jobs as against 44.7 jobs in agriculture and 12.6 jobs in case of manufacturing industries.
Economic liberalization has given a new impetus to the hospitality industry. The Indian
hospitality industry is growing at a rate of 15 percent annually. The current gap between supply
and demand expected to widen further as the economy opens and grows. The travel and
hospitality industry continues to be the sector, which has largely profited from the fast7growing
economy of India.
In 2006 tourists’ growth has risen to 15%. The compounded growth in tourist inflow over the last
ten years been 8.2%, while in the last five years, growth stands at 9.1% per annum. This increase
in the number of tourist arrivals in the country lifted the country’s standing in the world of tourist
destinations. The sector continues to face certain problems.8
The country continues to be marred by poor infrastructure facilities like poor road management,
rail, air and sea connectivity. However, the present government in its endeavor has taken a few
initiatives like opening of the partial sky policy. This allows private domestic airline operators to
fly on the Indian skies. Some states continue to be in political uncertainties. The five- s t a r
hotel segments have grown the fastest during the last five years at a CAGR of 12%. Further,
this segment can be divided into 3 sub-segments Luxury, Business and Leisure. The growth in this
segment indicates the genre of travelers coming into the country. Over the last few years
the country has witnessed a large influx of business travelers in the country owing to relaxation of
the government’s stand on Foreign Direct Investments (FDI) for most of the sectors in the
country. Many foreign companies have already tied up with prominent Indian companies for
setting up new hotels, motels, and holiday resorts. The entry of McDonald’s, PepsiCo’s
Kentucky Fried Chicken, Domino’s, and Pizza Hut has given an international glitz to the
hospitality sector. The gestation period is usually between three and four years.
7 Manpower recruitment in Hotel industry, A market plus report of Ministry of tourism, Government of India.
(http://tourismindia.com)
8 Investment opportunities in Tourism Sector, Government of India portal Investment Commission
(http://www.investmentcommission.in/tourism.htm#v)
Tourists Attraction:
A rapidly growing middle class, the advent of corporate incentive travel and the multinational
companies into India has boosted prospects for tourism. India's easy visa rules, public freedoms
and its many attractions as an ancient civilization makes tourism development easier than in
many other countries.
9Article on, ‘A study on Foreign Direct Investment (FDI) in Indian Tourism’ by Dr. P Srinivas Subbarao.
Available at: http://dspace.iimk.ac.in/bitstream/2259/544/1/, Last Accessed: 15.10.2013
10 Sanford, D.M. and H. Dong (2000) “Investment in familiar territory: tourism and new foreign direct
investment,” Tourism Economics 6(3): 205-19
11 Toda, H.Y. and P.C.B. Phillips (1993) “Vector autoregressions and causality,” Econometrica,
61(11):1367-1393
Moreover, the investments to be made are also capital intensive and the facilities require
periodic renovation, up-gradation and up-keep much like plant and machinery.12
In due consideration of this, it would be necessary to provide to Hotels depreciation rates that
match the nature of investment and operations. The relevant provisions of section 32 of the IT Act
may be amended.
The WTTC in its status report on tourism in India has underlined the need to ‘open up the
accommodation sector’ stating that, if India is to achieve its full potential in tourism, it needs a
‘manifold increase’ in the number of rooms for all categories of visitors.
12 Meyer, D, Foreign Direct Investment in Tourism - The Development Dimension - Expert Advisory
Committee (2005- 2006). Funded by United Nations Conference on Trade and Development, Geneva,
Switzerland.
13Akhilesh Sharma, Amar Johri and Ajay Chauhan, ‘FDI: An Instrument of Economic Growth &
Development in Tourism Industry’ <http://www.ijsrp.org/research-paper-1012/ijsrp-p10103.pdf>
14Akaike, H. (1974) “A new look at statistical model identifications,” IEEE Transitions on Automatic Control 19:
716-723.
15 Enders, W. (1995) Applied Econometric Time Series, John Wiley & Sons, Inc, New York
Other sectors like roads, power, telecommunications, airports, ports etc. have been recognized
as ‘infrastructure’ and given higher incentives under the Income Tax Act. These benefits also need
to be extended to tourism, duly recognizing its multiplier effect on the employment generation,
income earning and foreign exchange earning potential of the economy. Such a step would boost
the much-needed expansion of the accommodation sector.16
Sec 80IA allows a deduction of an amount equal to 100% of the profits and gains derived from
an infrastructure project for ten consecutive assessment years.
Sec 10(23) G allows the Net Income after taking into account all related expenses of an
Infrastructure Finance Fund/Company to be exempt from tax if it has earned income by way of
financing an enterprise which is wholly engaged in the business of developing and/or maintaining
and/or operating an Infrastructure Project as defined in Sec 80 IA of the Income Tax Act, 1961.
16 Engle, R.F., and C.W.J. Granger (1987) “Dynamic model specification with equilibrium constraints:
co-integration and error correction,” Econometrica 55(3): 251-276.
17 Davidson, R. and J.G. MacKinnon. (1993) Estimation and Inference in Economics. Oxford University
Press.
6. CONCLUSION
India is losing out on the market share, vis-a-vis competing destinations. As is evident from the
adjacent figure, from 1990 onwards India’s market share has come down in respect of the major
source countries.18On the other hand, competition is increasing. The number of countries with
over 1 million tourist arrivals has increased from 15 in 1950 to 70 in 1999, whereas India’s rank
is at 40.
Recommendations:
There was need to rationalize the taxation on the hotel industry and adopt a single luxury tax
across the country. For provision of single-window clearances at the local, State and Central
Government levels to reduce procedural delays.
- There was need to rationalize the taxation on the hotel industry and adopt a single luxury
tax across the country. For provision of single-window clearances at the local, State and
Central Government levels to reduce procedural delays.
- Tax holiday would encourage FDI in this sector and more players to set up hotels, to
bridge the shortage of rooms which according to Government estimates stood at one lakh
rooms.
- Section 72 (A) of the Income Tax Act should be amended such that it is made applicable
to the Hospitality sector also by using the word ‘undertaking’ in lieu of ‘industrial
undertaking’.
19http://dipp.gov.in/English/acts_rules/Press_Notes/press4_01.htm
20 Dr. H. A. C. Prasad & R. Sathish “Policy for India’s Services Sector”
<http://finmin.nic.in/workingpaper/policy%20Paper%20on%20Services%20Sector.pdf>
BIBLIOGRAPHY
Books:
• Batra G.S., Tourism in the 21st century, (1996) Anmol publications Pvt. Ltd.
• Usha C.V. Haley, (2001), Tourism and FDI in Vietnam, Haworth Press
• Toda, H.Y. and P.C.B. Phillips (1993) “Vector autoregressions and causality,” Econometrica,
61(11):1367-1393
Reports:
GOI, (2005) „Mid term Appraisal of the Tenth five year Plan (2002-2007)‟
Planning Commission, New Delhi.
Articles:
• Sanford, D.M. and H. Dong (2000) “Investment in familiar territory: tourism and new
foreign direct investment,” Tourism Economics 6(3): 205-19
• Investment opportunities in Tourism Sector, Government of India portal Investment
Commission . Available at: http://www.investmentcommission.in/tourism.htm#v
• Manpower recruitment in Hotel industry, A market plus report of Ministry of tourism,
Government of India. Available at: http://tourismindia.com
• Govt. to review FDI in Tourism Sector, News and Features, New Delhi,
February 13, (2007), (www.sarkaritel.com)
• Akhilesh Sharma, Amar Johri and Ajay Chauhan, ‘FDI: An Instrument of Economic Growth
& Development in Tourism Industry’ <http://www.ijsrp.org/research-paper-1012/ijsrp-
p10103.pdf>
• Investment opportunities in Tourism Sector, Government of India portal Investment
Commission (http://www.investmentcommission.in/tourism.htm#v)
• Article on, ‘A study on Foreign Direct Investment (FDI) in Indian Tourism’ by Dr. P
SrinivasSubbarao. Available at: http://dspace.iimk.ac.in/bitstream/2259/544/1/, Last
Accessed: 15.10.2013
• Dr. H. A. C. Prasad & R. Sathish “Policy for India’s Services Sector”
<http://finmin.nic.in/workingpaper/policy%20Paper%20on%20Services%20Sector.pdf>
Websites:
• http://www.academia.edu/1165345/Foreign_Direct_Investment_in_Tourism
• http://www.edutoursindia.com/100-fdi-in-tourism-industry/
• http://dipp.gov.in/English/acts_rules/Press_Notes/press4_01.htm
• http://finmin.nic.in/workingpaper/policy%20Paper%20on%20Services%20Sector.pdf
• www.fhrai.com.