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ABCDs of Indian Hospitality

Travel & Tourism, of which Hospitality is a part, is acknowledged to Alleviate poverty. This article summarises its scope and factors facilitating growth of hospitality in India under the acronym ABCD i.e., Built-up area/FSI, Certificates, Duties.
Avantika Singh

The ABCDs of the Indian Hospitality sector are:

Alleviating Poverty - Hospitality is an integral part of tourism as tourists form the common denominator for both. Tourism is one of the world’s largest and fastest-growing industries and its importance for economic development is widely acknowledged. Since tourism provides employment and diversified livelihood opportunities or additional income the World Travel Organization’s (WTO’S) Declaration, ‘Harnessing Tourism for the Millennium Development Goals (MDGs)’ urged nations to utilise tourism as an effective tool to alleviate poverty and integrate it in their poverty reduction programmes. Alleviation of poverty is one of the eight Millennium Development Goals (MDGs) that the United Nations set for the international community to achieve by the year 2015, to which India too is a signatory. At the macro level, tourism can also contribute through direct taxation since taxes can then be used to alleviate poverty through education, health and infrastructure development.

The contribution of the Travel & Tourism economy to employment in India is expected to rise from 31,105,000 jobs in 2009, 6.4% of total employment or 1 in every 15.6 jobs to 40,037,000 jobs, 7.2% of total employment or 1 in every 13.8 jobs by 2019, according to World Travel and Tourism Council (WTTC) estimates. Thus the true power of tourism must be exploited further for the development of the people and the state.

However, the growth of Hospitality in India is impeded by the next three issues i.e. Built-up Area/FSI, Certificates/Licenses and Duties/Taxes; emerging from the shadows of these issues will augment the growth of Hospitality in India.

Built-up Area/Floor Space Index (FSI) - The FSI determines the maximum permissible built-up area on a plot and it is a ratio between the total built-up area and the plot area. Principles of town planning suggest that buildings with high FSI should be in the centre and low FSI towards the periphery so that the city spread is not higher and accompanying problems of transportation are easily resolved. However, most Indian cities offer some of the world’s poorest FSI; on an average, maintaining the FSI between 1.33 and 3.75, though some have raised it to 5. Low uniform FSI causes congestion and increases cost of infrastructure, transport, fuel consumption and adds to pollution. On the other hand Hong Kong and Shanghai have FSIs of 10 while US cities like New York (in Manhattan), have even higher FSI at over 20. The FSI in India is, thus, inadequate for builders to spread their costs on the plot of land and maintain profits. The low FSI in turn leads to many of the hotel projects becoming five-star or luxury hotels in order to make up for the expensive land;  in effect deterring the growth of budget/economy hotels. Today, it is a well-accepted fact that domestic tourism will be the main driver of the tourism industry in India in the years to come; and domestic tourism needs the establishment of budget/economy hotels. A higher FSI will, however, necessitate adequate planning for parking as well as better public transportation.

HVS recommends a higher FSI, accompanied by quality public transportation and parking spaces, in order to facilitate the development and viability of budget/ economy hotels.

Certificates/Licenses – Being a state subject, hotels have to apply for multiple licenses and approvals through multiple government agencies, starting from permission to develop, to start construction to permission to open. A typical hotel may require approaching upto 40 different agencies at both the national and state levels to obtain 70-110 licenses depending upon which state it is located in, as well as the complexity of the development! In many states, rules are fluid and regulations/statutes are open to loose interpretations. This pushes the project schedule back by 6-12 months and is detrimental for new hotel development.1

Moreover, at each step of this license acquisition process that is compounded by lack of transparency in the system there is a potential for further delay, which makes conditions ripe for unethical business practices for parties with vested interests. The time delays make hotel development much more expensive – the total project costs are already amongst the highest in the world due to high interest rates – and also scare away many potential investors.

HVS recommends a simpler single-window process for approval – one which is both transparent and swift.

Duties/Taxes - Most countries around the world have a single unified tax structure, which adds to their attractiveness as global tourist destinations. However, tourism being a state subject in India, each state has its own criteria for luxury tax, varying from 5% to 20%. Luxury tax is supposed to boost the state’s revenue; however, in reality it discourages people from reaching out more to quality places because of the exorbitant rates – thereby retarding growth of the hospitality sector.

Due to competition and off-seasons, the tourism industry is forced to offer concessions (to the tourist). However, the states continue to tax the industry on rack rate, rather than the actuals. Thus, hotels in many states charge Luxury Tax on the Published Room Tariff as against the universally accepted practice of actual tariff charges. Luxury tax on the rack rate increases the effective rate of tax to 25-30%. In addition to the luxury tax, guests pay significant amount of taxes on Food and Beverages, and Alcoholic products in the form of VAT, sales and excise tax (in states where VAT is not yet in force). Again, there is no uniformity in the tax system and variations exist at state levels in matters like VAT, sales tax and excise duties1, which further adds to the confusion in the mind of the guests/travel agency.

HVS recommends imposing a single luxury tax based on the actual room tariff in addition to uniform tax rates on food and beverages, and liquor, uniformly across all Indian states.


1 Manav Thadani and Saurabh Gupta. Critical Issues Facing Indian Hospitality – An HVS Whitepaper, January 2009.

Avantika Vijay Singh is Editor for HVS India. She holds an MS in Biomedicine from the Birla Institute of Technology and Sciences (BITS), Pilani. Avantika passed with distinction the Master's level course on "Introduction to Strategic Sustainable Development" from the Blekinge Institute of Technology, Karlskrona, Sweden in December 2010. In February 2012, she did a course on ‘Water Footprint: Concept and Applications’ from the World Bank Institute in collaboration with the Water Footprint Network and University of Twente. For further information, please contact: asingh@hvs.com

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