COLEGIO DE STA. ANA DE VICTORIAS, INC.

Osmeña Avenue, Victorias City, Negros Occidental, 6119

MODULE 2
LEARNING MODULE
BLENDED FLEXIBLE LEARNING
Legal aspects in Tourism and Hospitality (THCC 318)

AN OVERVIEW

INTRODUCTION

Marla and John are planning their vacation. The couple saved for a couple of years for a
dream trip to Greece. Even though they scrimped and saved, they're still working within a budget.
Their plan was to travel in June because the weather is perfect.
When they sat down to price their trip, they had sticker shock. Room rates were
astronomical. Disappointed, they looked into several other dates, like August, January, and
February. Although most of summer and winter was not ideal, they noticed that the rates dropped
significantly during off-season months, which are months that are not as popular and attract fewer
travelers.
On this module, we will further discuss about rate, taxes, and other charges of the hotels.

LEARNING OUTCOMES
At the end of this module, you should be able to:
1. To define tariff.
2. To identify different basis for charging room rates.
3. To distinguish the different rate codes used in the hotels.
4. To recognize the different taxes used by hotels.

LEARNING RESOURCES

3G E-learning., (2019). Legal Aspects in Tourism and Hospitality, 3 G E-learning LLC, USA
LEARNING INPUTS

LESSON 5 TARIFF & BASIS OF CHARGING ROOM RATES

What is Tariff?

Tariff is the rate or charges offered to the guest by the hotel for the use of different facilities
and services, during their stay. Commonly, tariff is a charge of room rates and other facilities.
Tariff is a charge of room rates and other facilities. Tariff or room charges may include meal or
breakfast depending upon the plan as per the guest choices. Prices of hotel services are
incorporated in a card known as the 'tariff card'.

Tariff card is the card containing the rates or price charged by a hotel for accommodation.
Tariff card may include meals depending upon the types of plan the hotel offers to the guests.
Prices of meals and other hotel services are also printed in the hotel tariff card.

Basis of charging room rates:

The sale of rooms contributes more than 50% of total revenue generated in the hotel. Rooms
are charged on the following basis:

1. The 24 hours basis:

In twenty-four hours basis the room is charged for the stay of 24 hours. If a guest arrives at 9
am today, the room charges will cover until 9 am tomorrow. No concession will be given if the
guest leaves few hours earlier. His/her hotel day begins at 9 am every subsequent day. There is
not any fixed time for check-in and check-out.

2. The 12:00 noon:

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 COLEGIO DE STA. ANA DE VICTORIAS, INC.
Osmeña Avenue, Victorias City, Negros Occidental, 6119

A particular time of a day is fixed, mostly 2:00 PM as a check-in and check-out time for all the
guests; hotel day begins at this time. In some hotels check-in and check-out time are same but in
many hotels they are different. The reason is that the hotel needs a few minute to prepare the
room for the next guest. Normally the check-out time in many hotels is 12 noon.

3. The Nightly basis:

Here, the charge is fixed, according to the nights spent in the hotel. If a guest stays from 10
am until 6 am the next day, the guest in charged for one night or a day.

4. Type of customer

Hotel may vary in room rate according to the type of customer also. The rate may be increase
or decrease according to the purchase power of the customer, guest from the relative sources,
repeated guest etc. A businessman expects a high facilities and service in term of high rate. But
other leisure customer or educational group expect limited services and facilities in term of low
rate.

5. Season of Year

Hotels are normally full occupied during the pick season. For this season hotel basically
charged rack rate for the room. While during the off season the rooms are charged at low rate so
to motivate the flow of tourist.

(Don’t forget to answer the Self – Check Question 2.1 and Activity 2.1!)

LESSON 6 TYPES OF RATE CODES USED IN HOTELS

Hotels always have more than one rate code category for each room type. Room
rates categories generally correspond to types of rooms available to sell in the hotel.
(Example: Suite, Deluxe, Premier, Studio, Penthouse etc.).

Room Rates and rate codes may also vary according to the available room features such as
room size, location, view, furnishing, décors, etc. and also with competitors pricing.

Standard Room Rates and Rate codes used in the hospitality industry:

• Rack Rate: Is the Standard rate or Published tariff defined by the hotel management for
a particular room category/type. This is generally printed on the tariff sheet of the hotel
and these details are also submitted to the local government authorities for hotel
licensing and in some countries for Gov. tax compliance. In other words these rates are
always without any sorts of discounts.

• Corporate or Commercial Rate: These are rates offered to companies that provide
frequent business for the hotel or its chain. This rate may vary according to the volume of
business guaranteed by the companies. Eg: NEG1, COR1 etc.

• ADHOC Rate Code: These are normally non-standard rates which are offered as special
one-time rates for first time corporate's.

• Group Rate: These are rates which are offered to groups, meetings and conventions
using the hotel for their functions.

• Promotional Rate Codes: These rates are generally offered during

low occupancy periods to any guest to promote occupancy. Early Bird Rates, Stay for 3
and pay for 1 etc. are some examples. These rates may also include certain add-ons to
attract the customers like free WiFi for 24 Hrs, free buffet dinner etc.

• Incentive Rate Code: The Rate offered to individuals who belong to an association or
holders of special membership cards or Credit cards. Eg: Amex / VISA / Master
cardholders get 5% discount on Rack Rate, Lufthansa Frequent Flyer members get a
25% discount etc. For hotels, these rates always give potential referral business.

• Early-bird Rate: This type of rates are only open X days before arrival. Eg: Open only
when 7 Days before arrival, 14 Days Before Arrival, 30 Days Before arrival Etc.

• Family Rate: A rate reserved for families with children. Usually, these rates include Extra
Bed charges and may also include some free add-on activities for children.
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 COLEGIO DE STA. ANA DE VICTORIAS, INC.
Osmeña Avenue, Victorias City, Negros Occidental, 6119

• Package Rate: Rates that includes a guest room in combination with other available
events or activities. ( Eg: Best of London package which includes room rental, all meals,
site seeing, airport transfers etc. ) Package rate can be also a simple room and meal
package like American Plan ( AP), Modified American Plan (MAP), Continental Plan (
CP )etc.

• Best Available Rates ( BAR ): These rate codes are the lowest discounted rate
available for a day which can be offered to the guest by the Reservation or Front
desk staff. BAR can be of different types:

➢ 'Dynamic BAR' - Has different tiers and each tier will be opened and closed according to
the occupancy of the hotel. (The new age hotel management software's does this
automatically for the Revenue Managers.)

Sample Dynamic BAR Rate

Open / Close when

BAR Level
Occupancy Between

BAR -01 0% TO 25 %

BAR -02 26 % TO 35 %

BAR - 03 36% TO 50%

BAR - 04 51% TO 75%

BAR - 05 76% TO 100%

➢ 'Daily BAR' - Has a pre-defined daily room rate regardless of room categories ( Run of
the house) and occupancy, these rates are set according to the day of the week, as per
the demand of hotel rooms in the city, special day's or seasons, as per the room
demand forecast done by the hotel revenue manager.

Sample Daily BAR Rate

DATE DAY RATE ($)

19/10/2016 WED 200.00

20/10/2016 THU 200.00

21/10/2016 FRI 250.00

22/10/2016 SAT 250.00

23/10/2016 SUN 250.00

24/10/2016 MON 200.00

25/10/2016 TUE 200.00

• Complimentary Rate: A Room rate with zero room charge which is offered to special
guests, industry leaders, Gov. officials etc.

• House use Rate: A Room rate with zero room charge which is used for rooms stays for
hotel purpose. Eg: Manager or duty room, In-house General / Resident manager room
etc.

• Zero Rate Code: This kind of rates are used as system requirements for PMS's as these
would be tagged to Dummy rooms, Paymaster rooms and Group Master rooms.

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 COLEGIO DE STA. ANA DE VICTORIAS, INC.
Osmeña Avenue, Victorias City, Negros Occidental, 6119

• Virtual Rate / Follow Rates: A Special Type of rate codes whose values are derived
from another rate code or rate group. Eg: BAR1 which is 10% off on the Rack Rate.

(Don’t forget to answer the Self – Check Question 2.2 and Activity 2.2!)

SERVICE TAX VS. SERVICE CHARGE

LESSON 7
Hotels, inns, commercial guest houses, serviced apartments and other businesses providing
temporary stay facilities, play a major role in the travel and tourism industry. The accommodation
services provided by such businesses come under the service tax regulations. In this section, we
provide a detailed assessment of service tax for hotel industry.

Service tax is payable to services provided by the provider. It is similar to excise duty where
an amount is payable on goods that are manufactured. It is a type of indirect tax that is collected
by the Government after consuming the taxable services provided by travel agents, restaurants,
cable providers, cab services etc.

Service Tax vs. Service Charge

Service tax is a tax levied by the Central Government and all services provided by a service
provider except those notified in the negative list are liable for payment of service tax. On the
other hand, service charge is a charge levied by the hotel for providing a service. While service
tax collected is remitted with the Government, service charge collected is retained by the hotel
itself. Hence, the levy of service charge is at the discretion of the hotel management, while the
levy of service tax is a mandatory requirement.

Difference between Service Tax and Service Charge

A service tax is a tax that is levied by the government for whom certain services are provided. A
service charge is an unofficial charge levied by restaurants for services provided. When one goes
to pay the bill in a restaurant after dining there, they might notice certain charges on the bill in
addition to the cost of the dish. One of these additional costs may be service tax; another may be
a service charge. Many people assume them to be the same, or worse do not even check, which
is how many restaurants tend to dupe their customers. However, in reality, a service tax and a
service charge are two very different things.

A service tax is a tax that is levied by the government for whom certain services are provided.
Any service, such as a phone bill payment or hiring a room in a hotel or eating in a restaurant is
taxable by the government under service tax. However, the tax is usually not applicable on the
whole bill, but rather only on certain services, which make up only part of the bill. Technically, the
Service Tax is applied on the business that provide the services, and not on the customers, but a
clause allows the businesses to collect the service tax from its customers, which is what they
often do.

In comparison, a service charge is a charge that is levied for the services provided.
However, the service charge is not levied by the government and is not paid to the government
by the business. The service charge is purely a charge by the restaurant or business on the
customer, which directly goes into the business’s profit. Restaurants often charge a service
charge for services rendered such as serving the food at the table, cleaning the table, etc.
Furthermore, as there is no law regulating this, businesses charge anywhere between 5% to 20%
as a service charge, this is applied on the whole bill. It is generally accepted that if a restaurant
charges a customer a service charge, then the customers do not have to pay a tip. However,
some restaurants expect their customers to pay both, even though they both are payment for
service. Hence, an unsuspecting customer may end up a service tax, a service charge, and a tip,
all in addition to the bill itself.
• Applicability of VAT for Hotels
VAT or Value Added Tax is a tax levied on sale of goods and products. The sale of food products
by a restaurant in a hotel attracts VAT under the relevant state laws. However, the
accommodation services provided by a hotel do not attract VAT.
• Applicability of Service Tax for Hotels
By way of a service tax notification, the Central Government has exempted renting of rooms with
a declared tariff of less than $1000 from the applicability of service tax. Declared tariff is the
charges for all amenities provided in the room like furniture, air-conditioner, etc., without including
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 COLEGIO DE STA. ANA DE VICTORIAS, INC.
Osmeña Avenue, Victorias City, Negros Occidental, 6119

any discount offered on the published charges. In addition to the exemption available for rooms
with a declared tariff of less than $1000, service tax is also not applicable for those hotels
providing taxable services of less than $10 under the exemption available for small service
providers.

• Service Tax Rate for Hotels

Service tax is applicable only on 60% of value of rent of room, inn, guest house, clubs or other
commercial places meant for lodging purposes. However, when service tax is paid only on 60%
of the total value, no CENVAT credit or Input Credit can be claimed by the service provider.

• Example: Hotel Service Tax

In case a hotel has a declared tariff of $1500 per room per night, provides a discount of $600
and charges $900 to the customer, then the service tax applicable would be as follows:
✓ Service Tax Exemption: Though the charge levied to the customer is $900, service tax
would still be applicable as the declared tariff is $1500, which is above the service tax
exemption threshold.
✓ Service Tax Applicable: Service tax would be charged on only the actual amount paid by
the customer. Hence, service tax would be calculated on $900, which is the amount paid
by the customer.
✓ Service Tax Rate: Service tax would be levied only on 60% of the amount paid by the
customer.

(Don’t forget to answer the Self – Check Question 2.3 and Activity 2.3!)

Lesson 8 EXPENDITURE TAX IN HOTELS OR RESTAURANTS

Expenditure tax is computed according to The Expenditure Tax Act 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 $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:

• Payments made (expenditures incurred) in foreign exchange.

• 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.
• 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 Expenditures are not direct spending by government. If it were not 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.

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 COLEGIO DE STA. ANA DE VICTORIAS, INC.
Osmeña Avenue, Victorias City, Negros Occidental, 6119

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
household’s after-tax income more directly through tax credits or preferential rates for specific
activities.

Examples of Expenses for a Restaurant Business

Restaurants are businesses with high overhead costs and a high potential for waste. The two
largest expense categories are labor and food and beverage. Food and beverage expenses are
categorized on financial statements as the cost of sales. All other expenses are listed as
operating expenses, though they can be further divided into additional categories.

• Labor Costs
Labor is one of the two major expenses of any restaurant. Examples of labor costs include
salaries, wages, benefits, unemployment taxes and service commissions. It can also include the
cost of providing employees with uniforms. For most restaurants, labor costs are considered
variable as they rely on shift workers and part-time employees that vary according to business
volumes. Restaurant managers have to forecast labor needs carefully so that they neither
schedule too few or too many employees.

• Cost of Goods Sold

The cost of goods sold represents the second largest expense for restaurants: food and beverage
costs. Other examples of cost of goods sold include the preparation equipment found in the
kitchen; however, these will not be categorized as cost of goods sold on an income statement as
most equipment -- such as stoves, slicers and other preparation equipment -- are depreciated
over time. Most restaurants have goals for keeping their food cost at a set percentage, such as
33 percent, of their food sales.
• Marketing
A restaurant’s marketing expenses include everything it does to get guests to come and eat food
in the restaurant. One of the most important marketing tools is the menu, as it will dictate many of
the other expenses a restaurant has. Other examples of marketing expenses include table tents,
entertainment, music, coupons, advertising and website expenses.

• Occupancy Expenses
Occupancy expense is a category that splits out into all those expenses related to the
restaurant’s physical building. This can include property taxes, rents, insurance and utilities. It
also includes such things as signage and any parking fees or expenses the restaurant might
incur.

• Repairs and Maintenance

The repairs and maintenance category of expenses can be defined as all those expenses
incurred to keep the restaurant operating. These can be divided into the maintenance needs of
the building itself, the dining area, the kitchen and the food preparation and cleaning equipment.

• Administrative Costs
The administrative costs of a restaurant are very similar to those incurred by other businesses.
They can include office supplies, telephone charges, postage and fees to professionals such as
accountants and lawyers. Restaurants also must pay a number of licensing fees to local health
departments and for beverage licenses, if they serve alcohol.

(Don’t forget to answer the Self – Check Question 2.4 and Activity2 .4!)

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