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HomeIncome TaxA Complete Guide To Luxury Tax in India: Understanding the Basics

A Complete Guide To Luxury Tax in India: Understanding the Basics

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Luxury Tax is one such tax the government levies on certain luxury goods and services deemed non-essential or indulgent. A luxury tax is imposed on those goods and services that are affordable and used only by high-net-worth people. 

The luxury tax is one of the oldest taxation systems in the world. India’s tax mechanism is generally progressive, such that higher-income earners are subject to higher tax rates. Tax rates are further increased by surcharges and cess when income crosses a threshold. There are various types of taxes, such as income tax, GST, customs duties, etc. In this article, let’s look at India’s luxury tax system. We will also examine the history behind its implementation and how it is subsumed under the GST system.

Did you know? Greece levies a luxury tax on pools over 25 square meters. Citizens cover these pools with green coverings to avoid satellite monitoring and taxes.

What is a Luxury Tax?

Luxury refers to something high-end, premium or indulgent. It is often considered non-essential or discretionary and purchased primarily for prestige value rather than functional utility. Luxury definitions vary depending on individual preferences and social contexts. 

Examples of luxury goods include high-end cars, designer clothing, jewellery, watches, private jets and luxury homes. Luxury services include high-end hospitality, fine dining and personalised services. 

The State Government collects the tax, and the revenue generated is used to develop tourism, infrastructure and other related projects.

Also Read: Learn About Self Assessment Tax Meaning & How to Calculate It


History of Luxury Tax in India 

The luxury tax was first introduced in India in 1996 to generate revenue from the hospitality industry. The tax was initially levied on hotel accommodation charges and targeted luxury hotels and resorts that cater to high-net-worth individuals. 

Individual state governments initially implemented the luxury tax, and the rates varied from state to state. Some states charged a fixed percentage of the room tariff, while others imposed a flat rate based on the hotel’s star rating.

Later in 2009, the government introduced a uniform tax rate of 12.5% on hotel accommodation charges. This replaced the earlier system of variable tax rates. Finally, in 2016, the luxury tax was subsumed under GST and other indirect taxes.

Luxury Tax Rates on Hotel Accommodation 

Since individual state governments implemented the luxury tax, the rates differed from state to state.

Following are the luxury tax rates in Goa

Sr.No.

Room Rent Per Night

Tax Rate

1

Below ₹ 500

Exempted

2

₹ 501 to ₹ 2000

5% per annum

3

₹ 2001 to ₹ 5000

8% per annum

4

Above ₹ 5000

12% per annum

Following are the luxury tax rates in Karnataka

Sr.No.

Room Rent Per Night

Tax Rate

1

Below ₹ 500

Exempted

2

₹ 501 to ₹ 1000

4% per annum

3

₹ 1001 to ₹ 2000

8% per annum

4

Above ₹ 2000

12% per annum

Impact of GST on Luxury Tax 

The Goods and Services Tax (GST) has significantly impacted India’s luxury tax regime.

Under the GST system, the luxury tax is subsumed in the broader category of indirect taxes. Thus the concept of a luxury tax is replaced by GST. GST law does not define luxury goods and services separately. Instead, it has imposed a higher tax rate on items already covered by a former luxury tax.

Through this, luxury tax rates were standardised nationwide, and compliance was streamlined. GST has increased luxury goods and services tax rates. For example, the tax rate on hotel accommodation charges has been raised from 5% to 12% or 18%, depending on the room tariff. This has increased hotel stays costs, affecting industry demand.

Also Read: How the Director General of Income Tax Investigation Works?

GST Rates on Luxury Items

GST rates applicable to various goods and services are considered luxury.

GST Rate on Hotel Accommodation 

Till 17th July 2022, GST was exempt from hotel accommodation charges up to Rs.1000 per day. However, from 18th July 2022, the exemption is withdrawn, and the following rates will be applicable.

S. No.

Type of Service

Rates applicable

1

Room rent up to ₹ 7500 per day

12%

2

Room rent above ₹ 7500 per day

18%

GST Rate on Luxury Properties 

Apart from GST, the 2023 budget proposes to cap deduction benefits available under sections 54 and 54F of the Income-tax Act to 10 crores. As per the existing law, capital gains arising from the sale of long-term assets like residential property are exempt if invested in another residential property.

Following are the GST rates applicable to house property.

Type

City

Value of the Property

Carpet Area of the Property

GST Rate

Affordable Housing

Metropolitan city

Up to ₹ 45 Lakhs

60 sqmt

1% without ITC

Affordable Housing

Non-Metropolitan city

Up to ₹ 45 Lakhs

90 sqmt

1% without ITC

Non-Affordable Housing

Any city

More than ₹ 45 Lakhs

Any area

5% without ITC

GST Rate on Luxury Cars 

Category

Length of the car

Engine capacity

GST Rate

GST Cess

Petrol

Up to Sub 4 meter

Less than 1200 cc

28%

1%

Diesel

Up to Sub 4 meter

Less than 1500 cc

28%

3%

Petrol

Any length

1200 cc to 1500 cc

28%

17%

Diesel

Any length

Above 1500 cc

28%

17%

Petrol / Diesel

Greater than 4 meters

Any capacity

28%

17%

SUV

Greater than 4 meters

Above 1500 cc

28%

22%

GST Rate on Cigarettes and Tobacco Products 

India is the second largest tobacco consumer despite its ill effects. To reduce this, various taxes are levied on tobacco products, such as Central Excise Duty, National Calamity Contingent Duty (NCCD), GST and GST Compensation cess.

Type of Product

Excise Duty

NCCD

GST

GST Compensation Cess

Cigarettes upto 65 mm

5%

₹ 230

28%

5% ₹ 2076

Cigarettes having a length between 65 mm to 70 mm

5%

₹ 290

28%

5% ₹ 3668

Filter Cigarettes having length up to 65 mm

5%

₹ 510

28%

5% ₹ 2076

Filter Cigarettes having a length between 65 mm to 70 mm

5%

₹ 510

28%

5% ₹ 2747

Filter Cigarettes having a length between 70 mm to 75 mm

5%

₹ 630

28%

5% ₹ 3668

Other Cigarettes including tobacco

10%

₹ 850

28%

36% ₹ 4170

Cigarettes made using Tobacco substitutes

5%

₹ 690

28%

₹ 4006

Also Read: Everything About Income Tax Slabs for FY 2022-23 (AY 2024-25)

Criticism of the Luxury Tax 

The luxury tax was introduced and implemented to discourage luxury consumption and directed at the wealthy elite. But over time, the tax has faced criticism for being regressive and affecting the middle class, who may consume luxury products or services yet are not as wealthy as the elites.
Conclusion 

Luxury tax has been one of the most significant taxes levied by the government to regulate luxury item consumption and encourage responsible spending.

Though the luxury tax is now subsumed under GST, its purpose remains unchanged and is achieved by a higher tax rate. While the impact of GST on luxury tax has been mixed, luxury tax continues to be a major source of revenue for the government. It plays a major role in promoting equitable wealth distribution in the country.
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