All you need to know about luxury tax

Luxury is a very subjective concept. What one may deem a luxury might be deemed a necessity by others. Hence, it was initially considered to be a challenge for the Indian tax administration to deal with the concept of luxury and levy taxes on the same.However, with the changing times and the introduction of a clear and definitive taxation structure, it became easier for the government to levy luxury tax actively. Read on to learn more about luxury tax in India .

• Luxury tax is a tax levied on luxury goods and services.
• A GST of 28% is also levied on such luxury items.
• The luxury tax rate varies between 5% and 28% depending on the type of product and its rate.
• Luxury tax is included in the price of goods and services and you don't need to file it separately in your returns.

Luxury tax, as the name suggests, is a statutory tax imposed on services offered by various hotels, spas and resorts. You are mandated to pay the applicable luxury tax even if you are not satisfied with the services provided to you by any particular hotel or accommodation.The current luxury tax rate under the Goods and Services Tax Act (GST) is 28%.

To understand the luxury tax & definition better, you must first understand what is defined as 'luxury' in this context.As per the Luxury Tax Act, “Luxury means a service or commodity that is specified as ministering comfort, enjoyment or pleasures to a person’s life”. Services offered by hotels, spas and resorts are considered to fall under the category of luxury, whereas, food and beverages served by hotels, restaurants, and other places do not fall under the aforesaid category.For instance, let’s say that you visit a particular resort with your family for the weekend. Upon leaving the resort, you are billed an amount of ₹50,000 for using the resort food, spa and lodging services.
The bill components are:

• Food bill- ₹15,000
• Lodging bill - ₹25,000
• Spa bill - ₹10,000

In this case, you must pay luxury tax only on the lodging and spa services you use, i.e. ₹35,000. No luxury tax will be charged on ₹15,000 you pay for food.

The luxury tax was launched in India in 1996 to generate revenue from the Indian hospitality industry. It was mainly focused on targeting luxury resorts and hotels that offered services in the form of accommodation to high-net-worth individuals.Initially, there was no fixed rate of luxury tax; it was levied by the individual states at their discretion, as a fixed percentage on the hotel room tariff by some or as a flat rate based upon the hotel’s rating by others. Doing so resulted in varying tax charges across the country, which created confusion among people, who eventually demanded a simplified and consistent tax structure.This led to the introduction of a uniform tax rate, i.e., luxury tax,which began to be charged at a fixed rate of 12.5% on hotel accommodation charges nationwide. This initiative was taken by the Indian government in 2009 to introduce a simple taxation structure in the country and eliminate the then-existing system of variable tax rates.However, in 2016, the government introduced the Goods and Services Tax Act (GST). GST was introduced as a comprehensive tax, eliminating multiple indirect taxes and merging them under one head.This process of subsuming various indirect taxes under one major tax led to the following positive changes

• It eliminated the need for filing luxury tax on a monthly or quarterly basis.
• It helped in streamlining and simplifying the Indian taxation system.
• It gave a clearer definition of various services and products to be considered eligible for the luxury category, including hotels, restaurants, health clubs, spas, beauty parlours, swimming pools, etc.
• Categorising these services and products led to a more definitive taxation structure.

The state commercial taxes department or the excise department, with the help of their sub-departments such as VAT, service tax and entertainment tax, are in charge of the smooth execution and collection of luxury tax in their respective states.To carry out the collection and tax filing process efficiently, these departments have developed independent websites and other channels in each state. This has been done to help luxury service providers like hoteliers, club owners, etc. get easy access to forms for tax payment registration.By registering on the website, such service providers can pay the luxury tax and file returns. However, it has to be kept in mind that the process of filing returns and the last date of filing returns are the same for all persons across the country. Hence, all Indian citizens must file their returns before the due date in the specified format to avoid paying penalty charges.

It is levied on all the hotels, lodges, resorts, conference halls, congregational halls and various clubs that provide lodging services to their customers. However, it should be noted that the tax slab rate for different hotels and restaurants varies and depends hugely upon:

Their annual turnover

Restaurants with an annual turnover of less than ₹5 crore levy a luxury tax at the rate of 5%.

Whether the facility is air-conditioned or non-air-conditioned

If you visit a restaurant with AC facilities, the applicable luxury tax rate is 18%, whereas if you visit a restaurant without AC facilities, then the applicable tax rate is 12%.

Room Tariff

The tax rates for different room tariffs are as follows:

Luxury tax is applicable on the services mentioned below:

• Services provided to club members, such as donations, fees, deposits, or other state-mandated charges.
• Hotel services provided to their in-house residents.
• Spa, beauty parlours, swimming pool and health club services.
• Hospital services charging an amount of ₹1000 or more, plus 8% tax daily.

If you like to enjoy certain luxuries in life, it is important to understand what is luxury tax in India and its impact on your purchases. This will help you determine the actual cost of goods and services that you buy and the additional tax paid on them.