SKYLINE BUSINESS SCHOOL

Assignment of
Tourism Planning Development
Faculty: Mr. Hitesh Manocha
Submission date: 19th March 2010

Submitted by:
Rajat Suri
BBA L3S2
Question
1. India is not attracting the number of international tourists it can potentially
get. An area of concern is lack of investments in hotel industry. Poor quality
hotels are the other issue in many towns of India?
2. Analyze the reasons for the same. What are the government policies on
foreign investments in hotels

Answer

The hospitality industry is projected to witness a severe decline in its

revenue in 2008/09 and 2009/10, when compared with 2007/08
figures. The adverse impact on hotel economy has been assessed on
the total nationwide room count of 1,20,000 rooms. Separate set of
assumptions have been utilised to project the occupancy and rates for
the financial years 2008/09 and 2009/10 for the branded and
unbranded hotels. The resultant annual revenues have been compared
against the revenue in 2007/08 to understand the level of decline in
business. HVS estimates the Indian hotel industry to face a
consolidated revenue decline of around Rs 9,731 crore between
2008/09 and 2009/10, from its base year (2007/08) revenues. There is
lack of enough fiscal incentives for entrepreneurs to invest in this
capital-intensive industry.

The hospitality sector in India continues to face the following

challenges:

1. Shortage of skilled employees: One of the greatest challenges

plaguing the hospitality industry is the unavailability of quality
workforce in different skill levels. The hospitality industry has failed to
retain good professionals.

2. Retaining quality workforce: Retention of the workforce through

training and development in the hotel industry is a problem and
attrition levels are too high. One of the reasons for this is unattractive
wage packages. Though there is boom in the service sector, most of
the hotel management graduates are joining other sectors like retail
and aviation.

3. Shortage of rooms: The hotel industry is facing heavy shortage of

rooms. It is estimated that the current requirement is of 1,50,000
rooms. Though the new investment plan would add 53,000 rooms by
2011, the shortage will still persist.

4. Intense competition and image of India: The industry is

witnessing heightened competition with the arrival of new players, new
products and new systems. The competition from neighboring
countries and negative perceptions about Indian tourism product
constrains the growth of tourism. The image of India as a country
overrun by poverty, political instability, safety concerns and diseases
also harms the tourism industry.

5. Customer expectations: As India is emerging as a destination on

the global travel map, expectations of customers are rising. The
companies have to focus on customer loyalty and repeat purchases.

6. Manual back-end: Though most reputed chains have IT enabled

systems for property management, reservations, etc., almost all the
data which actually make the company work are filled in manual log
books or are simply not tracked.

7. Human resource development: Some of the services required in

the tourism and hotel industries are highly personalized, and no
amount of automation can substitute for personal service providers.
India is focusing more on white collar jobs than blue collar jobs. The
shortage of blue collar employees will pose various threats to the
industry.

Reasons for Low FDI in Indian Tourism

The following are the some of the reasons for low foreign direct
investment in this sector. They are:
 • Multitude of taxes-

Ours is the highest tax structure on tourism projects in the Asia Pacific
region. Expenditure Tax of 10% is charged in hotels ‘wherein room
charges for any unit of residential accommodation are Rs.3000 or more
per day’ while, simultaneously, States levy Luxury Tax ranging from
5% to 25% on the hotel tariff. Taking into account heavy administrative
costs of collection of HET by Central Govt. The problem has got
magnified due to
increase in the threshold limit, which used to be Rs.2000 per day per
individual to Rs.3000 per day during
Union Budget 2002-03. With the removal of the words “per individual”,
the benefits of raising the
threshold limit were nullified and therefore benefits could not be
passed on to tourists.
• High Taxes-

One of the fundamental problems plaguing the Indian tourism sector is

a multitude of Central and State
level taxes, which lead to an 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
• Delay in FDI Approvals & Govt. Policies-

Huge delay in Foreign Direct Investment approvals in Hotel & Tourism

sector. Due to delay in
approvals and lack of guidelines in the tourism policy, the Alfred Ford’s
proposed Himalayan Sky Village
is pending since last three years. If it is approved it is one of the
highest FDI in the country in tourism sector with US$ 300 million which
also provides employment to around 3000 people.
• Highest import duty on imported liquor used in hotels:

Under the WTO Negotiations for Market Access under the Agreement of
Agriculture (AoA), India had
bound its tariffs at 100% for primary products, 150% for processed
products (this is the relevant category
for liquor) and 300% for edible oils, except for certain items
(comprising about 119 tariff lines), which
were historically bound at a lower level in the earlier negotiations

• Service Tax on Tour Operators

The services provided by a tour operator typically includes a wide

range of services covering
transportation, boarding and lodging arrangements, local sight-seeing
and guide services, etc. which are
procured through sub-agencies. Even though 60% abatement is
provided, taxation of the gross service
amount leads to double taxation and increases the burden for the
tourists.

• Inland Air Travel Tax

Air connectivity and Pricing are proven to be critical barriers in India’s

ability to become competitive in the
global tourism market. In the current context, domestic air travel is
much more expensive than
international destinations located at a similar distance. The disparity
between Foreign Travel Tax (FTT)
and Inland Air Travel Tax (IATT) is one of the major factors. FTT
constitutes between 2%- 3% of the
ticket price while IATT effectively constitutes 12%-13% of the total
ticket price, except for north-eastern
states where the latter has been exempted.

• Hardships in Income Tax Act Relating 7o Hospitality

Industry

The provisions of Section 194-1 of the Income Tax Act are applicable to
the payments made by the tour operators and travel agents to various
hotels on behalf of foreign tourists for the services provided to the
tourists by the hotels. Tax is deducted @ 20% with a 1% additional
surcharge for the FY 2002-2003. (Tax is deductible if payment to payee
during the year is expected to be Rs. 1, 20.000 or more) The tourism
industry typically experiences cancellations to the tune of 50%, which
is a situation peculiar to the Tourism sector alone. With tax refunds in
India being a
Reasons to invest in this sector

• 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 government forecasts an additional requirement of 200,000
rooms by the turn of the century.

• The travel and hospitality industry continues to be the sector, which

has largely profited from the fast growing economy of India. This has
largely been due to the 3.9 m tourist arrivals in FY06 (15% growth)
over the previous period. The compounded growth in tourist inflow
over the last ten years (FY96-FY05) has 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 country is
ranked fourth among the world’s must see countries. The sector
continues to face certain problems.

• 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.
• As per the 2004 findings, the total number of approved rooms by the
Government of India stands at around 99,000 (estimated). These
rooms are further classified into various segments out of which, Five
star and Five star deluxe hotels account for around 27% of the total
capacity, three star hotels (22%), four star (8%), two star (9%), one
star and Heritage hotels (2% each) and the rest is divided between
unclassified and unapproved hotels.

• 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.

• The five star 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 have given an international glitz to the hospitality sector.

• It costs an average of US$50-80 million to set up five-star hotels with

300 rentable rooms in India.
The gestation period is usually between three and four years.

S.W.O.T ANALYSIS OF HOTEL INDUSTRY

Strengths
 • A very wide variety of hotels is present in the country that can
fulfill the demand of the tourists.
• There are international players in the market such as Taj and
Oberoi & International Chains. Thus, the needs of the
international tourists travellers are met while they are on a visit
to India.
• Manpower costs in the Indian hotel industry is one of the lowest
in the world. This provides better margins for Indian hotel
industry.
• India offers a readymade tourist destination with the resources it
has. Thus the magnet to pull customers already exists and has
potential grow.

Weaknesses
• The cost of land in India is high at 50% of total project cost as
against 15% abroad. This acts as a major deterrent to the Indian
hotel industry.
• The hotel industry in India is heavily staffed. This can be gauged
from the facts that while Indian hotel companies have a staff to
room ratio of 3:1, this ratio is 1:1 for international hotel
companies.
• High tax structure in the industry makes the industry worse off
than its international equivalent. In India the expenditure tax,
luxury tax and sales tax inflate the hotel bill by over 30%.
Effective tax in the South East Asian countries works out to only
4-5%.
• Only 97,000 hotel rooms are available in India today, which is
less than the Bangkok hotel capacity.
• The services currently offered by the hotels in India are only
limited value added services. It is not comparable to the existing
world standards.

Opportunities
 • Demand between the national and the inbound tourists can be
easily managed due to difference in the period of holidays. For
international tourists the peak season for arrival is between
September to March when the climatic conditions are suitable
where as the national tourist waits for school holidays, generally
the summer months.
• In the long-term the hotel industry in India has latent potential
for growth. This is because India is an ideal destination for
tourists as it is the only country with the most diverse
topography. For India, the inbound tourists are a mere 0.49% of
the global figures. This number is expected to increase at a
phenomenal rate thus pushing up the demand for the hotel
industry.
• Unique experience in heritage hotels.

Threats
• Guest houses replace the hotels. This is a growing trend in the
west and is now catching up in India also, thus diverting the hotel
traffic.
• Political turbulence in the area reduces tourist traffic and thus
the business of the hotels. In India examples of the same are
Insurgency in Jammu Kashmir and the Kargil war.
• Changing trends in the west demand similar changes in India,
which here are difficult to implement due to high project costs.
• The economic conditions of a country have a direct impact on
the earnings in hotel industry. Lack of training man power in the
hotel industry.

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.
• 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’.
• It is recommended to increase the depreciation rate to 100% in
order to incentives hotels to install
• Pollution control equipment and energy generating devices to
protect the environment.
• For the calculation of Book profit for the MAT provisions under
Sec. 115 JB, Sec 80HHD profits
• should be allowed as a deduction on par with the deduction
available to Sec 80HHC/E/F profits, as
• Under these relevant sections all the assesses deal with foreign
Exchange.
• Service Tax should be computed based on the value of service
provided, in the nature of VAT; rather
• than on the gross amount
• Concessions under Section 10(5) (B) of IT Act should be restored
and spa consultants should also be
• included
• Inland Air Travel Tax should be applied at the rate of 5% of the
basic ticket price.
• The Government should implement the kelkar Committee
recommendations in reduction of basic
• Custom duty on aviation turbine fuel. There by the inland travel
prices will reduce.
• Tax Deduction at Source pertaining to payments made to hotels
under Section 194-1 of the Income
• Tax Act should be reduced to 5%.
• The depreciation rate on hotels should be reverted to 20% from
the current rate of 10%.
• 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’.
• Tourism should be declared as infrastructure industry and Hotels
and Convention centre should be
• included in Sec 80IA of the Income Tax Act,1961 and also
entitlement to tax-exempt income on
• Investment under Section 10 (23) G of the Income Tax Act, 1961.
• Extend the exemption available under sec 801B for Specified
hotels and Non-specified hotels till 2010 and also apply