Imposition Of Higher Property Tax On Luxury Hotels By MCD Not Arbitrary: Delhi High Court

The Delhi High Court has recently held that the imposition of a higher rate of property tax on luxury hotels by the Municipal Corporation of Delhi (MCD) is not arbitrary or capricious, noting the economic profile of the clientele such establishments are designed to attract.Upholding the classification of hotels based on their star ratings as a valid exercise of legislative power, Justice Purushaindra Kumar Kaurav said:“The classification passes the test of reasonableness under Article 14 of the Constitution, as it is based on an intelligible differentia and bears a rational nexus with the object of raising revenue from those who are economically capable.”“It is apposite to reiterate that calibration of tax rates on the basis of the economic potential of an entity is not unknown to law. Historically, it has been a recognized criterion for imposing a greater tax burden and has played an instrumental role in stabilizing the economic scales by enabling the State to ensure equitable distribution of the common resources by putting a proportionately higher burden on those with better means,” the Court said.Justice Kaurav was dealing with a batch of pleas challenging the recommendations made by the Municipal Valuation Committee (MVC) under Section 116 of the Delhi Municipal Corporation Act, 1957, implemented by the MCD for levying property tax on the petitioner hotels.The petitioner hotels had sought quashing of the imposition of the rate of tax as 20% as against 10% which was imposed before. The majority of the pleas concerned hotels of the erstwhile 5- star category. The rating of 5-star was allegedly reclassified as 4-star with effect from February 07, 2022.In September 2022, MVC-V submitted its Final Report to the MCD which was officially accepted on November 04, 2022. MVC-V recommended a user factor (UF) of 8 for 5-star and above hotels, while UF-4 was assigned to all other types of hotels. Subsequently, on April 19, 2024, MCD implemented the MVC-V recommendations, which came into effect from April 01, 2023. Disposing of the pleas, the Court held that the classification of hotels on the basis of star ratings does not suffer from the vice of arbitrariness or discrimination under Article 14 of the Constitution of India. It said that the star-rating system, being an objective and universally recognised yardstick prescribed by the Ministry of Tourism, is a system of self-classification and furnishes an intelligible differentia distinguishing luxury hotels from ordinary hospitality establishments.The Court also said that the classification bears a rational nexus with the legislative object of imposing a higher fiscal incidence on establishments catering to affluent clientele and availing premium amenities. “Having voluntarily sought and obtained the benefits of star accreditation, the petitioners cannot now assail the consequential fiscal obligations, the doctrine of approbation and reprobation squarely operating against them. The uniform levy of UF-10 and property tax at the rate of 20% on 3-star and above hotels is, therefore, a valid exercise of legislative discretion and withstands scrutiny under Article 14 of the Constitution,” it said.“The imposition of a higher rate of property tax on luxury hotel establishments cannot be construed as arbitrary or capricious, particularly in light of the economic profile of the clientele such establishments are designed to attract. These enterprises voluntarily situate themselves within a premium segment of the hospitality industry, offering high-end amenities and exclusive services that cater to patrons of considerable means, individuals who, by virtue of their financial capacity, are already contributors to the higher tax brackets across various statutory schemes,” it added. Justice Kaurav said that the star-ratings are based on a host of factors and are intended to target a certain section of society and thus, the hotels placed in a common star category share similar economic dynamics. The Court held that the exaction of tax from such similarly placed hotels could not be termed as arbitrary or unconstitutional.It added that in the hospitality sector, particularly, the assignment of star ratings to hotels carries substantial weight and operates as a representation of the quality, standard, and amenities guaranteed to the consumer. “It is further pertinent to note that in the contemporary digital age, the relevance of such categorisation is accentuated, inasmuch as leading travel and hospitality platforms such as MakeMyTrip, GoIbibo, Agoda, and similar aggregators invariably reflect and segregate hotels under distinct classifications, wherein the category of '5-star Hotels' is separately denoted and highlighted. The said classification, therefore, operate critical factor in consumer choice and decision-making,” the Court said. Further, it was held that the recommendations of the MVC, as adopted by the MCD, were in strict conformity with the procedure enshrined in Sections...

Imposition Of Higher Property Tax On Luxury Hotels By MCD Not Arbitrary: Delhi High Court

Nupur Thapliyal

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