NEW DELHI: The Delhi High Court has stated that the increase in property tax rates for luxury hotels imposed by the Municipal Corporation of Delhi cannot be considered “arbitrary or capricious,” especially when viewed in the context of their target clientele’s economic background.
The court explained that luxury hotels actively pursue star ratings, positioning themselves within a niche aimed at affluent customers while providing premium experiences at high prices.
Justice Purushaindra Kumar Kaurav, delivering the judgment on September 12 (published on the court’s website on September 16), noted, “The legislative intent behind the higher property tax rates for these establishments is to fairly distribute the fiscal load, ensuring that those with greater financial capacity contribute proportionately to public revenues.”
The decision arose from a series of petitions by several luxury hotels contesting the Municipal Valuation Committee (MVC) recommendations under the Delhi Municipal Corporation Act, implemented by the MCD for property taxation purposes.
Notably, the classification of 5-star hotels has allegedly been downgraded to 4-star status effective from February 7, 2022.
The petitioners sought to annul the user multiplier factor set at 10, arguing for a reduced tax rate of 20 percent, as opposed to the previous 10 percent. The MVC submitted its final report to the MCD in September 2022, which was officially approved on November 4, 2022.
MVC-V recommended a user factor (UF) of 8 for 5-star and higher hotels, while UF-4 was designated for other hotel types.
On April 19, 2024, MCD enacted the MVC-V recommendations, which took effect on April 1, 2023.
In dismissing the petitions, the court ruled that the classification of hotels by star ratings does not violate Article 14 of the Constitution regarding arbitrariness or discrimination.
The court emphasized that high-end luxury hotels, characterized by superior star ratings, offer premium facilities such as grand banquet halls, spas, fine dining, concierge services, and other luxurious amenities that set them apart from standard accommodations.
The court reiterated, “Imposing a higher property tax rate on luxury hotels is not arbitrary, especially considering the wealth of the clientele these establishments attract.” It noted that these hotels situate themselves in a premium market segment, providing top-tier services to clients with considerable financial means who are typically contributing to higher tax brackets.
The court stated that the star-rating system provides a clear and reasonable base for distinguishing between different hotel categories. “Requiring a new classification would unnecessarily complicate legislation and introduce subjectivity. The use of the star-rating system is rational and contributes to fairness while minimizing the administrative challenges of determining tax classifications for hotels,” Justice Kaurav remarked.
The relevance of this classification was highlighted as key travel and hospitality platforms, such as MakeMyTrip, GoIbibo, and Agoda, often present hotels under distinct categories, with ‘5-star Hotels’ prominently featured. This classification is integral to consumer choices and decision-making, validating the legislative power exercised in classifying hotels by star ratings.
