Luxury tax isn’t a standalone payment but is embedded in the cost of luxury products and services. Let’s delve into the origins, evolution, and application of this tax in India.
What Is Luxury Tax?
Luxury tax is an indirect tax levied on luxury services and facilities, particularly in the hospitality sector, such as hotels, spas, and resorts. Interestingly, it does not cover basic provisions like food or beverages in these establishments. Simply put, if you indulge in high-end services or accommodations, you are paying a luxury tax as part of your expenses.
According to the Luxury Tax Act, “luxury” refers to any service or product that enhances comfort or pleasure. Whether or not you prefer the service, the corresponding tax applies based on state-specific rates.
Example:
If you stay in a hotel in Rajasthan, a luxury tax will be added to your room rent. For instance:
- Room rent between ₹500 to ₹1,000 per night: 10% luxury tax annually.
- Room rent above ₹1,000 per night: 12.5% luxury tax annually.
Evolution and Rates of Luxury Tax
Luxury tax has evolved significantly since its introduction in 1996. Initially targeted at high-end hotels and services, it has expanded to cover various segments of the hospitality industry. In 2017, luxury tax was integrated into the Goods and Services Tax (GST), and luxury items were placed in the highest GST slab of 28%.
Under GST, luxury tax rates are determined based on the type of establishment and its turnover. The rates vary by state, with state governments collecting this tax through commerce or excise departments.
State-Wise Luxury Tax Examples
- Delhi:
- Rooms with rent starting from ₹750: Luxury tax ranges from 5% to 10%.
- Spas, gyms, and health clubs: 3% luxury tax annually.
- Goa:
- Rooms up to ₹500 per night: Exempt from luxury tax.
- ₹500–₹2,000 per night: 5% tax annually.
- ₹2,000–₹5,000 per night: 8% tax annually.
- Above ₹5,000 per night: 12% tax annually.
- Karnataka:
- ₹500–₹1,000 per night: 4% tax.
- ₹1,000–₹2,000 per night: 8% tax.
- Above ₹2,000 per night: 12% tax.
- Tamil Nadu:
- ₹200–₹500 per night: 5% tax.
- ₹500–₹1,000 per night: 10% tax.
- Above ₹1,000 per night: 12.5% tax.
- Rajasthan:
- Hotels (except heritage hotels) charge 10% luxury tax.
- If the room rent exceeds ₹3,001 per day, an 8% luxury tax applies.
Why Was Luxury Tax Introduced?
Luxury tax was first implemented in India in 1996 to generate revenue from high-income individuals using premium hospitality services. Initially, it focused on luxury hotels and resorts but was later extended to all types of hospitality services. In 2009, a uniform rate of 12.5% was introduced to simplify the tax system. Post-2017, it was merged under the GST framework.
Where Is Luxury Tax Applicable?
Luxury tax is applied to a wide range of services, including:
- Club memberships (deposits, charges, or donations).
- Hotel accommodations and associated services.
- Spa, beauty parlor, swimming pool, health club, and similar services.
Luxury tax highlights the government’s effort to regulate the luxury services market while generating additional revenue. If you plan to enjoy premium facilities, understanding these taxes can help you better manage your expenses.
