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Understanding Expenditure Tax - Explained

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Understanding Expenditure Tax - Explained
April 07, 2017

What Is Expenditure Tax in India?

Expenditure tax in India is computed according to The Expenditure Tax Act of 1987 that governs all taxation-related processes associated with the chargeable expenditure that an individual incurs in certain hotels or restaurants.

This act defines chargeable expenditures provided that the charges are incurred in a hotel where the room rent is in excess of Rs.3,000 (per day), or the charges are incurred in a restaurant. An expenditure tax of 15% is collected from restaurants when it renders services deemed taxable and 10% of the charges incurred on payments made at a hotel.

As such a Chargeable Expenditure is defined under the Expenditure Tax Act, 1961 as an expenditure that refers to and includes any payment made to (or expenditure incurred in) the hotel which is connected to the provision of Accommodation that is either residential or otherwise, or accommodation in a hotel on hire or lease. A Chargeable expenditure does not include the following:

  1. Payments made (expenditures incurred) in foreign exchange (before the 1st of October, 1992).
  2. Payments made (expenditures incurred) by anyone within the purview of the Vienna Convention on Diplomatic Relations, 1961 or the Vienna Convention on Consular Relations, 1963.
  3. Payments made (expenditures incurred) in any shop / office which is not owned or managed by the person who carries on the business of a hotel.

Other respective charges such as those for food, drinks, and other services cannot be used to cover up the actual charge of the room rental, etc. If there are discrepancies in this regard, the Assessing Officer will decide on what amounts need to be charged under the various headings in the itemized breakup of the bill. It should be noted that in the case of room rent charges in hotels, the Assessing Officer of the Income Tax Department has the power and freedom to deem whether the breakup of charges has been mentioned in the correct manner.

The expenditure tax definition is not a simple one; the concept of tax expenditure is that, government is giving back money to achieve certain social goals, like strengthening housing sector or industrial sector. Tax Expenditure are not direct spending by government. If it weren't for tax exemptions, the amount deducted would have belong to government itself. So essentially, the Government is not collecting money to be re-distributed later, but providing tax exemptions for good governance.

Tax expenditures are of different types there are those that arise from tax provisions that reduce the present value of taxable income through deferral allowances, or special exclusions, exemptions, or deductions from gross income. These can be incentives from the government to promote investment in certain sectors like housing or rural development, etc., others affect a households after-tax income more directly through tax credits or preferential rates for specific activities.

There are also implications on the budget. Subsidies and their impact on Indian Economy is well documented, and the expenditure tax is looked into that when the finance minister presents the Union Budget each year.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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