A 2 per cent turn over tax instead of 15 per cent sales tax



Sep 02 - 08, 2002

After a long wait the Central Board of Revenue has reportedly agreed to exempt the hotel industry from 15 per cent sales tax and replace it with a 2 per cent turn over tax. The hotel industry, which is presently faced with a worst crisis in its history, has been clamouring for help from the government and asking for many concessions including exemption from GST.

According to press reports the CBR has agreed in principle to introduce a 2 per cent turn over tax for the entire hotel industry replacing 15 per cent general sales tax (GST). Hotels and Restaurants having annual income and aboveRs.1-5 million would pay 2 per cent turnover tax, whereas those having annual turnover below one million rupees would be exempted. However, hotels and restaurants aviling the turnover tax scheme would not be entitled to avail input tax adjustment on electricity, gas and other services or purchase of goods like crockery etc. The step would be instrumental in promoting the ailing tourism business, which is much below the international standards, because of less facilities and high cost.

According to sales tax officials, if the CBR gave permission to the hotels and restaurants to work under the turnover tax scheme, it has been estimated that around 80 per cent of the hotels/ restaurants would come under the slab of one million rupees or below, exempting them from payment of general sales tax (GST). However, those paying turnover tax under the slabs of Rs.1-5 million, would not be entitled to enjoy input tax adjustment, because they were bound to pay 2 per cent net tax on monthly sales.

While thanking for this "small gesture", Pakistan Hotel Association has demanded for more help and concession from the government to tide over this difficult period following the effects of September 11 events. According to the Association the withdrawal of the sales tax, which has been taken as an unwanted burden, will certainly be welcome but not its replacement with the turnover tax. For this may be taken as something given by the one hand and taken back by the other. It is, however, just another matter, that in view of the heavily taxed hotel industry, it may come as just a suggestion of relief and accepted as something better than nothing.

It may be recalled that the hotel industry has lately demanded of the government to drastically reduce the existing exorbitant sales tax at 15 per cent. Moreover, one of the more hurtful features of the sales tax on the hotel industry is that it is levied on the gross sales revenue, which also includes several other indirect taxes recovered by the provincial governments and other official agencies. The hotel industry has been demanding correction of this anomaly by excluding other duties and levies for the purpose of sales tax. The issue is likely to be resolved after the implementation of the proposal to withdraw sales tax and instead impose a turnover tax on the hotel industry.

It may be emphasised here that the hotel industry needs to be relieved of a multiple of taxes and levies, which have been causing strains on its profitability. The squeeze on profitability results in the inevitable transfer of high cost of operations to the customers in the form of service charges and on the other hand failure to bring the quality of its services at par with international standards, and that leads to low rate of occupancy in the country's 4 and 5 star-hotels. One of the old complaints of the hotel industry is the recovery of bed tax at the rate of 7.5 per cent by Sindh government on the basis of 70 per cent of room occupancy. This levy has been described as a harsh treatment of the hotel industry because the room occupancy is not usually as high as 70 per cent.

In fact, a closer examination of the obtaining situation will certainly bear out that the majority of hotels with annual turnover of less than Rs.1 million would earn complete exemption from the proposed turnover tax. For it has been reportedly estimated by the CBR that about 80 per cent of the hotels and restaurants fall in the category of turn over of up to Rs.1 million annually, thereby, enabling them to benefit from exemption from payment of sales tax. However, it will not mean the same thing for the hotels and restaurants of the higher turnover categories, that is the ones with a distinct role in the performance of the tourism industry which has been passing through difficult times, all the more so in the aftermath of the last year's nine-eleven tragedy its backlash in the form of targeted terrorist attacks on foreigners in Pakistan.

Already depressed by such unhealthy developments, the hotel industry will require quite some big relief to enable it to survive. Viewed in this perspective, the contemplated gesture will appear as leaving a great deal more generous initiative to be desired. For the proposed turnover tax would apply to hotels with turnover tangling from Rs.1 million to Rs.2.5 million and over. Moreover, it is yet to be ascertained as to whether the rate of turnover tax would vary for different sections within the prescribed category will carry a flat rate of 2 per cent for all of them. There is an urgent need of offering distinct big relief to the hotel industry.