Luxury Tax: Definition, Examples, And How It Works

The introduction of the Goods and Services Tax (GST) in 2017 has changed the landscape of the Indian indirect taxation system. It has subsumed the luxury tax and many other types of taxes.

Earlier, the luxury tax in India was considered an indirect statutory tax levied on luxury services. It was applicable to services other than food and beverages available at hotels, resorts, and spas.

Now, the ‘luxury tax’ and other ‘extras’ section of your bill has been replaced by GST. So, the name may have changed, but the levy remains.

What Is A Luxury Tax?

When you have to cough up anything extra in excess of the actual price, it can be a bother. It’s not nice to see extra figures added to the actual room tariff at the time of checking out. ‘Luxury’ is defined as a service or commodity used for enhancing comfort, enjoyment or pleasure. But irrespective of your experience in the hotel, the charges for ‘luxury' availed have to be paid.

It’s interesting that such 'luxury' refers to only the room you live in or the total staying charges. Neither the food and beverages nor any special service charges are eligible to be brought under this category. In other words, only the lodging is taxed.

Earlier, luxury tax was not directly under the central government. It differed from state to state.

The concept of luxury has always been challenging in the Indian taxation framework. It’s subjective and relative. After all, one's necessity can be another's luxury. The advent of GST, however, has put “luxury” and “sin” items in the highest tax bracket at 40% and luxury services at 28%.

Let us take a detailed look at the history of the luxury tax in India and its present state.

How Luxury Taxes Work

Luxury taxes are applied to generate revenue and discourage excessive consumption. They are typically included in the final price paid by consumers.

• In most countries, luxury taxes are part of more comprehensive taxes such as Goods and Services Tax (GST), whereby luxury taxes are imposed on costly products at higher tax rates.

• The tax is imposed on the point of sale and is transferred to the government by the businesses, hence it is an indirect tax that is paid by the consumer.

• The taxes are typically computed as a percentage of the value of the product, which adds to the ultimate cost of acquisition.

• Luxury taxes enable governments to raise the amount of revenue they raise and facilitate fair taxation by placing a higher burden on discretionary expenditure.

Examples Of Luxury Taxable Items

Luxury taxes are normally imposed on high-value and non-essential goods and services that portray high purchasing power. Some examples are as follows:

• Tax rates or the cess levied on luxury cars, sports cars and imported cars are normally higher since they are priced high. In India, smaller cars are taxed at 18% GST, while mid-size and large cars (petrol >1200cc, diesel >1500cc, length >4000mm) , including qualifying SUVs/utility vehicles, attract 40% GST under the revised structure

• Valuable commodities, such as jewellery, diamonds, gold ornaments, and fancy watches, are usually taxed as luxury goods, owing to their high prices and non-necessity.Gold, diamond, and silver jewellery are generally taxed at 3% GST on the total transaction value, while job-work charges on jewellery attract 5% GST.

• The high-end hospitality services, such as five-star hotels, luxury resorts and private villas, could face increased room tariffs and services tax. Hotel accommodation with room value up to ₹7,500 per unit per day was recommended to be taxed at 5% GST, while higher-value accommodation remains at 18% GST

• Luxury items, which include designer fashion products like branded clothing, handbags, shoes, and accessories, are classified as such and are subject to taxes. Branded clothing, handbags, shoes, and accessories are generally placed in the standard GST slab, which is commonly 18%, depending on product classification.

• Electronics and lifestyle goods such as large screen TV sets, high-quality smartphones and home automation systems can also be subject to higher taxation rates in some locations. Air conditioners, dishwashers, TVs, and monitors are now generally taxed at 18% GST under the revised GST structure.

Where Is Luxury Tax Applicable?

Luxury tax is imposed on luxury items or goods. Services also come under the purview of this type tax. How do you define luxury items? It’s pretty simple actually—they are those items that are not considered essential. Luxury cars, jewellery, high-priced hotel rooms are things that provide luxury to the consumer. These come under the scope of luxury tax. Restaurants, spas, and resorts charge taxes on the services provided. Under the old tax system, the tax rates for these services used to differ from one state to another. Under the GST, however, the rates have become standard across the country. They come under different tax slabs according to different prices. This makes the use of goods and services under certain price slabs even more expensive.

The following are some of the services that come within the definition of luxury:

1. Payments for enjoying the services provided by a club. Deposits, membership fees, donations, or any other associated expenses.

2. Lodging facilities provided by hotels/resorts in exchange of a specific daily tariff

3. Services enjoyed at spas, beauty parlours, health clubs, or swimming pools

Understanding Luxury Tax Rate

As already noted, the earlier luxury tax system varied across states. However, with the introduction of the Goods and Services Tax (GST), these state-wise luxury tax slabs have been replaced by a uniform, nationwide tax structure.

For hotel and accommodation services, GST rates are now based on the declared room tariff per unit per day, as follows:

• If your room costs ₹7,500 or less, you will pay 5% GST. There is no ITC.

• If it exceeds ₹7,500, the GST rate increases to 18%, and ITC can be claimed.

How Luxury Tax Is Included In GST

GST came into effect all over India on 1 July, 2017 as a destination-based tax system. Its principal goal was to bring all indirect taxes under one umbrella. It subsumed almost all types of indirect taxes.

Luxury goods and services include hotels, lodging houses, resorts, and conference or banquet halls. But GST on luxury services is not limited to them. It is also applicable to clubs that provide lodging facilities on their premises.

GST has different tax slabs for hotels and restaurants depending on the revenue. It also differentiates between air-conditioned and ordinary properties. So, customers pay more depending on the class of restaurant. The tax slabs for three-star hotels and five-star hotels would also be different.

GST rates for restaurants and food services are given in the following:

1. 5% at restaurants of all standards and categories.

2. 5% at restaurants (including room service and takeaway services at hotels with room rates less than ₹7,500).

3. 5% on food provided by the Indian Railways Catering and Tourism Corporation (IRCTC) / Indian Railways or their licensees, both on railway platforms and inside trains.

4. 18% at restaurants (including room service and takeaway services at hotels with room rates more than or equal to ₹7,500).

5. 5% on standard outdoor catering services.

These rates and classifications do not remain fixed. They are revised periodically by the government, so the figures referenced here may change over time.

Luxury Tax Returns And Returns Filing

Before the introduction of GST, many indirect taxes were not uniform in India. Every state had its own laws and systems. Like all commercial taxes, luxury tax returns would also be filed either on a monthly or quarterly basis. GST has streamlined and standardised the entire process. The dates and procedure of filing GST across industries and across the country are the same.

Source

Clear Tax