The Delhi High Court upheld the Municipal Corporation of Delhi’s (MCD) decision to impose a higher rate of property tax on luxury hotels, ruling that the policy is not arbitrary or capricious but grounded in a reasonable distinction aligned with economic capacity. Justice Purushaindra Kumar Kaurav determined that basing property tax rates on star ratings of hotels satisfies constitutional requirements under Article 14, since there exists an intelligible differentia between luxury hotels and standard hotels, and a rational nexus with the objective of raising revenue proportionately from establishments capable of paying more.
The case arose from multiple petitions filed by hotels seeking to quash the tax rate increase from 10% to 20%, as imposed post-recommendations by the Municipal Valuation Committee (MVC). Many petitioners were from the former 5-star category, some of which had been reclassified as 4-star from February of 2022. MVC-V submitted its final report in September 2022, which was accepted by MCD on 4 November 2022. Among its recommendations, MVC-V proposed a “user factor” (UF) of 8 for 5-star and above hotels, while assigning UF-4 to other hotels. The implementation of these recommendations by MCD took effect from 1 April 2023, although the formal notification implementing them was issued on 19 April 2024.
In the petitions, the hotels challenged the application of UF-8 and 20% tax rate, contending that the imposition was discriminatory, lacked justification, or was arbitrary. The Court rejected these challenges, emphasizing that star ratings are an objective, recognised standard issued by the Ministry of Tourism, a system of self-classification by the hotels themselves, which provides a discernible basis for distinguishing among different hotel categories. Since hotels have voluntarily sought star accreditation, the imposition of higher taxes as a consequence is legitimate under constitutional principles.
Justice Kaurav noted that the classification bears a rational connection to the legislative purpose of imposing greater fiscal burden on entities that cater to more affluent clientele and provide premium amenities. The Court also observed that hotels in a given star category share similar economic dynamics, so applying a uniform “user factor” and tax rate to all hotels in the category does not amount to unfair discrimination.
The decision also addressed procedural aspects. The High Court found that the recommendations made by MVC, and their adoption by MCD under Sections 116A to 116C of the Delhi Municipal Corporation Act, 1957, were in strict observance of statutory procedure. The statutory scheme supplies a self-contained code for classification of properties, fixation of base unit values, user multiplicative factors, and public notice, invitation of objections, revision, and final adoption of recommendations. The Court held that the MVC’s process culminating in implementation by MCD was faithful to the legislative mandate and hence valid.
Justice Kaurav rejected the argument that the reclassification of some 5-star hotels as 4-star renders the levy unfair, finding that if the star rating itself has changed, then the classification and consequent tax liability follow from that changed status. The Court also reiterated the doctrine of approbation and reprobation, meaning that entities which voluntarily adopt or benefit from a recognized classification (such as star rating) cannot later challenge its consequences in taxation.
Accordingly, the High Court disposed of the batch of pleas and upheld the MCD’s imposition of 20% property tax (under UF-8) on luxury hotels (5-star and above or those falling in the applicable category), holding that such treatment does not violate Article 14, but rather demonstrates a valid exercise of legislative discretion in taxation consistent with constitutional norms.
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