Delhi HC upholds Higher Property Tax on Luxury Hotels holding Star Ratings Valid Basis for Classification [Read Order]

The Delhi High Court recently ruled that the Municipal Corporation of Delhi’s decision to impose a higher property tax on luxury hotels is neither arbitrary nor unreasonable, given the clientele such hotels are intended to serve.

Justice Purushaindra Kumar Kaurav upheld the validity of classifying hotels based on star ratings, observing that “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 High Court of Delhi said.

The Court was hearing multiple petitions challenging the recommendations of the Municipal Valuation Committee (MVC) under Section 116 of the Delhi Municipal Corporation Act, 1957, adopted by MCD for assessing property tax on hotels. Petitioners contested the enhancement of tax from 10% to 20% and the application of a higher “user factor” (UF-10) on 3-star and above hotels, many of which were previously classified as 5-star before a reclassification in February 2022.

In its final report submitted in September 2022 and adopted by MCD in November 2022, MVC-V recommended UF-8 for 5-star and above hotels, while UF-4 applied to others. MCD implemented these recommendations in April 2023 with retrospective effect from April 1, 2023.

Rejecting the petitions, the Delhi High Court held that the star-rating framework prescribed by the Ministry of Tourism is an objective, self-classification mechanism that clearly differentiates luxury hotels from ordinary establishments.

“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,” the court said.

The Court further stressed that, “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.”

Justice Kaurav concluded that hotels falling within the same star category operate under similar economic conditions, making uniform taxation valid. He also noted that in today’s digital environment, platforms like MakeMyTrip and Agoda highlight hotels by star ratings, to prove its role in consumer decision-making.

The Court found that MVC recommendations were adopted in accordance with the statutory procedure in Sections 116A–116C of the DMC Act and thus could not be struck down as arbitrary or beyond legislative authority.

“The process culminating in the adoption of the MVC’s recommendations by the MCD is, thus, held neither arbitrary nor ultra vires, but in faithful adherence to the legislative mandate,” the Court said.

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