Expenditure Tax

What is the Expenditure Tax in India?

The meaning of the expenditure tax was pretty simple. Unlike other taxes that are normally charged on income, the expenditure tax was focused on specific sorts of spending. Applied in India under the Expenditure-Tax Act,1987, it was charged on luxury service expenses like bills paid in high-end hotels and restaurants. The idea behind this was to make people aware of sensible spending and encourage savings.

Initially introduced in 1987, the taxable expenditure rule went through multiple amendments over time. Eventually, the government removed it from the financial year 1998-99.

What is Chargeable Expenditure?

When we talk about the expenditure tax, we need to understand what counts as taxable expenditure. Under the law, this was referred to as “chargeable expenditure,” meaning the amount spent on hotel accommodation, whether by hire or lease. For example, if someone hired a luxury suite or rented a room in a high-end hotel, that payment would be considered chargeable expenditure.

However, it does not include the following:

1. Payments made in foreign exchange before October 1, 1992
2. Payments made by individuals covered under the Vienna Convention on Diplomatic Relations (1961) or the Vienna Convention on Consular Relations (1963)
3. Payments are made in shops or offices that are not run by someone who operates a hotel business
4. Expenses that are a result of taxes under any tax rules
5. Payments in Indian currency were obtained by converting foreign exchange into Indian currency under specific conditions
   
   

Applicability

The Act applies to any chargeable expenditure incurred at a hotel where the accommodation charges are Rs. 3,000 or more. In some cases, a combined charge may be levied for both accommodation and food. If an Assessing Officer finds that the charges for accommodation, food, drinks, and other services are set up in a way to understate the room charges and overstate the rest of the charges, the officer has the authority to adjust the room charges accordingly. This is done to prevent tax evasion under the Act.

Taxability

The tax rates under this Act are^[1]:

1. 10% on the expenditure incurred at hotels
2. 15% on the expenditure incurred at restaurants
    

Tax Liabilities Under Composition Charge

When a combined charge is applied for both the room and food at a hotel, the room charges are figured out by subtracting the cost of food from the total charge. Here’s how the cost of food is deducted based on the total charges^[1]:

1. If the composite charge is up to 10% of the total charge, the cost of breakfast is deducted from the total
2. If the composite charge is up to 25% of the total charge, the cost of one breakfast and one meal is deducted
3. If the composite charge is up to 40% of the total charge, the cost of one breakfast and two meals is deducted
    

Collection Responsibilities

The person who owns the hotel or restaurant, or someone they appoint, is responsible for collecting the expenditure tax. The tax collected for a month must be sent to the Central Government by the 10th of the next month. If the person fails to collect the tax from the customer, they must still send the tax from their funds.

Furnishing of Returns

The people who collect the tax (like hotel owners) must submit an annual tax return to the government within four months of the end of the financial year (by July 31st). The return should include: ^[1]

1. The total amount of money received for chargeable expenses (like room charges and food costs)
2. The total amount of expenditure tax collected
3. The total tax that should be sent to the government
4. Any other details the government may ask for

If the person doesn’t submit the return on time, the Assessing Officer can send a notice asking them to submit the return within 30 days. The officer may also ask for additional documents, accounts, or evidence to check that the tax has been collected properly.

The Difference between Expenditure Tax and Income Tax

When you look at taxes, income tax and expenditure tax both helped the government generate income, but the mechanisms used were quite different. Income tax is concerned with how much you make, and it is progressive in the sense that more income means higher tax rates. Expenditure tax, on the other hand, observed what you spent money on, particularly high-end services such as costly hotels or entertainment, and imposed a flat rate. Therefore, regardless of what your level of income was, the tax rate remained constant.

The motive behind income tax was the distribution of wealth, whereas the purpose behind expenditure tax was to discourage extravagant or non-essential purchases. Rather than taxing income, it taxed the act of spending itself. For people seeking tax-saving methods, understanding this distinction was important.

While income tax motivated careful planning and investment, expenditure tax encouraged saving indirectly by making luxury consumption more expensive.

Tax Rates Under the Expenditure Tax Act, 1961

Before its removal, an expenditure tax of 2% was imposed on spending exceeding ₹30 lakh for individual or HUF. The tax applied costs related to purchasing, building, repairing, or upgrading immovable property, fuel (except kerosene for lightning), vehicles, entertainment, amusement, and international travel. Medical treatment costs were not taxed.

Let us understand it with an example. Suppose Mr. X has an annual expense of ₹36 lakhs; the tax will only apply to the amount above the ₹30 lakh level. The taxable expenditure in this example would be ₹6 lakhs, with a 2% tax liability of ₹12,000.

Key Takeaways

1. Expenditure tax was an indirect tax in India, charged on luxury spending rather than on income.
2. It mostly affected high-end hotels and restaurants, with rates of 10% on room charges and 15% on restaurant bills.
3. Chargeable expenditure referred to hotel accommodations and associated costs, with some exceptions such as diplomatic payments.
4. Hotel and restaurant owners were responsible for collecting and depositing taxes under the Expenditure-Tax Act of 1987, as well as filing annual returns.
5. An expenditure tax of 2% tax was on annual spending beyond ₹30 lakhs for individuals or HUFs, covering property, vehicles, travel, and entertainment.
6. The tax has been removed in FY 1998-99³.
    

Conclusion

Expenditure tax has been abolished in India. The main difference between income tax and expenditure tax is that the former is levied on an individual’s income, while the latter is levied on an individual’s spending. Expenditure tax was seen as a way to discourage luxury spending and encourage savings. However, it was generally considered unfair and unpopular and eventually abolished. Some countries still levied expenditure tax, though it is not common. ^[2]

FAQs

1. Who were responsible for collecting the expenditure tax?

   Hotel or restaurant owners or their appointed persons were responsible for collecting the tax.

   
   

2. What was the tax rate for hotel expenditures?

   The tax rate for hotel expenditures was 10%.

   
   

3. What was the tax rate for restaurant expenditures?

   The tax rate for restaurant expenditures was 15%.

   
   

4. When should the collected expenditure tax be sent to the government?

   The collected tax must be sent to the Central Government by the 10th of the next month of collection.

   
   

5. What happen when the expenditure tax return was not submitted on time?

   The Assessing Officer sent notice asking for the return within 30 days.

   
   

6. Has expenditure tax been abolished in India?

   Yes, the expenditure tax was abolished in India.

   
   

7. Was the expenditure tax progressive?

   No, the expenditure tax was flat, meaning everyone paid the same rate regardless of income.

   
   

8. What the process to report and pay the expenditure tax?

   The service providers, i.e. hotel and restaurant owners, were responsible for collecting the expenditure tax by including it in the bill. They later deposited the collected tax into the government.

   
   

9. Are there any exemptions or deductions allowed under the expenditure tax?

   Certain expenses such as official travel, medical treatment, and education-related costs may qualify for specific deductions or exemptions under the Income Tax Act, but they were not universally exempt from taxation.

   
   

10. What was the benefits of the expenditure tax?

    The main benefit of the expenditure tax was its straightforward method. Instead of focusing on income, it targeted luxury spending, ensuring that individuals who received high-end services also contributed to the government's revenue. It was simpler to administer and helped people be mindful about excessive spending on luxury products.

    
    

11. What where the limitations of the expenditure tax?

    The limitation of the expenditure tax was that it frequently raised prices for luxury services, which could reduce spending and harm industries like hotels and restaurants. was a because everyone paid the same rate, regardless of their income level. As a result, the tax became unpopular and was eventually abolished.
     

Sources:

1. https://unacademy.com/content/upsc/study-material/economy/a-simple-note-on-expenditure-tax-in-india/;
2. https://www.indiacode.nic.in/bitstream/123456789/1892/1/a1987-35.pdf
3. https://unacademy.com/content/upsc/study-material/economy/a-simple-note-on-expenditure-tax-in-india/#:~:text=What%20is%20Expenditure%20tax%20in,(Amendment)%20Act%2C%201997