Luxury Tax and Compliance

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Overview of Luxury Tax and Compliance

Luxury is described as a good or service that increases comfort, pleasure, or enjoyment. However, the costs associated with the 'luxury' you used must be paid regardless of how well your stay went.

It's fascinating that this kind of 'luxury' only applies to the room you reside in or the entire cost of your stay. Food and beverages are not permitted to be brought under this category, nor are any additional service fees. So, just the accommodation is subject to tax.

Prior to this, the central government had no direct control over the luxury tax. From state to state, it varied.

The Indian taxation system has never been particularly kind to the idea of luxury. It is both relative and subjective because one person's luxury may be another person's necessity. 'Luxury items' are now subject to the highest tax rate of 28% as a result of the implementation of the GST.

To satisfy the regulatory bodies, a yearly auditing service of the business owner's financial statements may be necessary, expensive, labour-intensive, and number-crunching. At Enterslice, we strive to assess the current business processes in order to help our clients manage their businesses profitably and effectively. We ensure that all of your difficult reporting needs are completed while keeping the hotel authorities and customs happy with the luxury tax they charge and the accommodation rate. 

Applicable Laws and Liability of Hotelier

  • If a hotel has the same legal standing as a corporation, then the Companies Act of 2013 may also apply to them. While the Income Tax Act of 1961 will be applied in all circumstances, regardless of the hotel's classification.
  • An auditor should use a letter of appointment to identify the scope of his audit. It should be determined if he is merely asked for his opinion on financial statements or if he is given extra responsibilities.
  • The auditor should obtain a list of the hotel's accounting records, paperwork, and registers.
  • He should check to discover if the pertinent hotels are independent or part of hotel chains.
  • The auditor should study the Memorandum of Association and the Articles of Association.
  • To confirm the land and building, he needs to collect the title deed and other relevant Paper works.
  • He should also get the Board of Directors meeting minutes so that he can record significant accounting, financial, and auditing decisions.
  • No hotelier subject to taxation under the Act may engage in, or induce to be engaged in, the business of renting out residential space for a fee unless he is in possession of the certificate of registration required by the Act. The hotelier who is responsible for collecting the tax from the clients may do so at a rate allowed by the law in effect at the time. When a company owns, manages, or operates a business, the company and each of its partners are jointly and severally accountable for paying taxes. Each hotelier who is required to have a certificate of registration must submit an application to the Commissioner in the appropriate form within thirty days of the date on which they first become responsible for paying the tax.

Documents Required

The luxury tax registration varies from state to state, but there are certain basic Documents that every hotelier is required to submit while getting registered:

  • Forms 1, 4, and 7 must be appropriately filled.
  • Photographs of the individual or partners.
  • The form must be properly completed, signed, and confirmed.
  • Proof of the hotelier's ownership or possession of the property (any Document proving proof of possession, such as a lease, contract, rent receipt, etc.)
  • Proof of residence addresses as provided in para-2 of Form 4 may be provided in the form of a copy of a driver's licence, voter identification card, passport, phone bill, electricity bill, affidavit, or other Documented proof.

Steps to be followed in Internal Audit

To begin with, you must determine whether the management has established the internal audit's scope or whether it can be carried out. If management has provided you with the audit's scope of work, follow those instructions. If not, simply begin the audit in the following way:

  • Create a plan for the audit and ask your superior to approve it.
  • Once the audit programme has been authorised, you just hand it over to the hotel's audit coordinator so that he may communicate it to the various departments.

Topics that need due attention:

  • Revenue - You must review the management's internal controls for a customer's In and OUT procedures.
  • The hotel's payment methods during the audited period.
  • In the event of cash, simply check before internal controls are set up by management for the acceptance of cash and other checks, such as cash given to the officer before they start their shift, cash given to them when their shift is over, etc.

Points to be checked by the Auditor while Luxury Tax and Compliance Audit Services


Income from room rentals

  • An auditor must thoroughly scrutinise the following details about revenue from room rent:
  • The hotel industry's primary source of income is room rental. Accounting software is used to handle billing (the majority of hotels use PMS software, which is highly common in the hotel industry).
  • According to the kind of accommodation, a predetermined tariff is used to calculate room rent.
  • Customers may be given discounts; this relies on a number of variables, including the time of year, holidays, and other things. Additionally, special discounts are provided to student groups, delegations, business clients, VIP clients, etc.
  • Hotels provide some VIP customers and hotel personnel complimentary accommodations.
  • The auditor must obtain the structure of the discount, and he must also confirm that the amount of the discount is within the permitted range. Discounts need to be authorised by the proper authorities.
  • An auditor should confirm the luxury tax applied to the room rent. The listed rack rate and the actual room income collected from clients are subject to the Luxury Tax in some states.
  • In the majority of states, complimentary accommodations are also subject to the luxury tax.
  • If hotel employees receive complimentary rooms, the Luxury Tax is exempt in that situation.
  • An auditor must confirm the state receives all Luxury Tax payments on schedule.
  • He must look into the retention fees that are taken from clients who cancel or fail to show up after making a reservation.
  • Regarding retention fees, an auditor should confirm the applicable legislation of luxury tax; in some states, the luxury tax also applies to retention fees.

Income from the Business Centre

The following factors should be taken into account by an auditor as they confirm business centre revenue:

  • Meeting space, fax, copy, and other business centre services are just a few examples.
  • Because business centre services are manually linked to billing and billing would be missing if manual tracking through the appointment register is lost, an auditor should carefully investigate these services.

Arcade Income

The following factors should be taken into account by an auditor when examining arcade revenues:

  • Hotels provide retail space for a fixed monthly charge in the lobby or in any other public area.
  • An auditor should examine the rent deed, contract deed, cash book, bank book, and cash receipt counterfoil to confirm this income.

Income from Car Rental

The following factors should be taken into account by an auditor when examining the revenue from car rentals:

  • Hotels offer their visitors the use of a car through specialised travel firms.
  • Charges for any automobile rentals made by visitors are added to their guest folio.
  • A travel agency pays a commission to a hotel depending on the fees the travel agency collects.
  • The invoices sent to consumers and the sum paid to the travel firms should be examined by an auditor.

Income from the phone and the internet

The following factors should be taken into account by an auditor as they confirm the revenue from telephone and internet use:

  • The EPABX system is used to charge phone bills, and the mechanism
  • Internet service providers use to charge for internet service.
  • Service Tax is added to internet purchases.
  • There are certain states, like Kerala, that add a luxury tax on phone bills.
  • Housekeeping earnings
  • This money is typically levied for services like babysitting and clothing sales.

Laundry-related Income

The following factors should be taken into account by an auditor as they confirm laundry revenue:

  • Both hotel staff and residents are offered laundry services.
  • Accounting software is used to bill customers in accordance with the offered rate.
  • An auditor should review the rates and confirm the invoicing with the housekeeping record.

Income from salons and fitness facilities

The following factors should be taken into account by an auditor as they confirm the revenue from beauty salons and health clubs:

  • Residents, walk-in visitors, and members can all use these amenities.
  • An auditor should check the visitor attendance log and the fee charged for service.
  • He needs to make sure that consumers are charged for all services.

Income from Scrap Sales and Empty Bottle Disposal

  • The following factors should be taken into account by an auditor as they confirm the revenue from the sale of scrap and the disposal of empties:
  • Scrap and empty containers may be sold for the agreed-upon amount or according to a one-time appraisal made at the time of sale.
  • An auditor should confirm the contract price if there is a deadline-based agreement between hotels and the scrap buyer.
  • Like selling empty cans, bottles, and other containers, the sale of dry scrap is crucial for hotels.
  • He should check the outgoing register, weighing slips and other Documents, as well as the price charged for them.
  • The cash receipt, cash book, etc., should all be verified by an auditor.

Food and beverage sales at restaurants

An auditor should take into account the following factors when assessing the revenue from food and beverages in restaurants:

  • At restaurants, there are two sorts of sales: one is to regular customers, and the other is to walk-in consumers. An auditor should confirm that the sale to a resident client is noted on the combined bill and that, in the instance of a sale to a walk-in customer, a cash receipt is given.
  • The appropriate rate of VAT should be applied to the bill.
  • Charge any applicable VAT and service tax on invoices.
  • If there are any appropriate service charges, an auditor should confirm them on the F&B invoices.

Food & Beverage Minibar revenue

The auditor must also confirm the sales of the food and drinks from the minibar; for this, the following factors must be taken into account:

  • The minibars in most hotels are always filled with booze, soft drinks, snacks, etc.
  • These products are billed depending on the guest's self-declaration on the form that is maintained in the minibar.
  • The minibar employee examines the invoices and consumption.
  • The auditor should check the daily report on product use and stock levels, and they should match the guest billing.

Income from banquets

The following factors should be taken into account by an auditor as they confirm banquet revenue:

  • Typically, the price that is being provided is a composite price for the food, drinks, and venue rental.
  • The aforementioned composite rate is based on a person.
  • Billing is based on minimum promised covers when the actual cover (meaning per person) is less than the agreed-upon rate. For instance, the cost of renting a banquet space with food and beverage for 100 people is Rs. 1,000,000, or Rs. 1,000 per person.
  • If there are actually 90 guests, the hotel will charge Rs. 1,000,000 at the guaranteed minimum.
  • If there are actually 120 guests, the hotel will bill Rs. 1,00,000 + 1,000 x 20 = 1,20,000/-.
  • Both VAT and service tax are billed at a composite rate.
  • Service Tax and VAT will be applied appropriately if the banquet venue rental and F&B costs are separate.

Services offered by Enterslice

  • Our team of top financial managers and accounting experts makes our tax preparation services the finest in the business.
  • Our team is working to raise the calibre of our product and service offerings while attempting to establish our financial and outsourcing accounting procedure as the new standard in the sector.
  • Tax rules are the type of laws that undergo modification and change every year. We provide our skilled specialists with the training they need to comprehend the finer points of the legislation in order to stay current with changes to taxes requirements and regulations.
  • Along with consistently improving our offerings, we also make an effort to make them inexpensive and available to all types of businesses. Everyone may make use of our fantastic services, from small enterprises and start-ups to large organisations.
  • There are many different tax laws, and each one has a complicated regulatory framework. Due to a surge in cross-border company activities, it has become even more complicated. We follow the law of the land and the legislation of the country in which a business operates.

Enterslice thus believes in adding value to your company by giving our clients professional tax advice, consulting on all tax-related difficulties, and help.

Frequently Asked Questions

Only for the purpose of determining the tax rate slab is the declared or publicised tariff relevant. GST will be due on the transaction value, which is the actual amount charged

The declared room rate would be used to establish the GST rate, which would be applied to the whole amount collected from the client. For instance, if the reported rate is Rs. 7000 per unit per day, but the client is charged Rs. 8000 for an extra bed, GST will be applied at 18% to the difference.

The tariff in effect at the time of supply would be used.

In any nation, ethical business practices are crucial. The primary goal of taxes is to generate revenue for the government. Sumptuary taxation is another name for the regulatory aims of taxes, which deal with regulation or control.

The stated tariff is the one that is posted everywhere, such as on the websites used to do business, on a tariff card, or on a sign that is placed at the front desk. The highest declared rate should be the stated tariff to levy GST if multiple taxes are declared at several locations.

If different rates are stated for various times of the year or seasons, the rate that is declared for the season when lodging is offered should be in effect.

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