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Expenditure Tax in India: Meaning, Applicability & Examples

Learn about Expenditure Tax in India, its historical roots in the 1987 Act and its applicability with some examples for a clearer understanding

Written by : Knowledge Centre Team

2026-02-23

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6 minutes read

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Taxes are usually associated with income or profits, but historically, governments have also experimented with taxing spending to promote fairness and regulate consumption. One such concept is the expenditure tax, which focuses on how much a person spends rather than how much they earn.

Key Takeaways

  • Unlike Income Tax, which targets earnings, Expenditure Tax focuses strictly on money spent on specific luxury services

  • The Expenditure Tax Act, 1987, specifically targeted high-end hotel stays where room charges exceeded certain thresholds

  • The tax was applicable only when spending crossed certain limits, such as a ₹3,000 room tariff, which meant it targeted high-value transactions rather than all consumers

  • Expenditure tax was designed as a consumption-based levy, ensuring that higher spenders contributed more without affecting essential everyday expenses

  • Although the Expenditure Tax Act, 1987, is no longer widely applied, its concept continues through modern indirect taxes like GST on luxury goods and services

In India, this form of taxation was introduced with the objective of curbing lavish spending and widening the tax base. While it is no longer part of the current tax framework, understanding expenditure tax in India offers useful insights into how tax policies evolve to address economic behaviour and social equity. Read along to know what the expenditure tax is, where it is applied, its history, examples, and why it still matters in public finance.

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What is the Expenditure Tax?

Expenditure tax is a form of direct taxation where the tax liability is determined based on an individual’s or entity’s spending rather than their income. Instead of focusing on how much money a person earns, this tax looks at how much they spend, especially on discretionary or luxury items.

The core principle behind the expenditure tax is that spending reflects purchasing power and financial capacity. Individuals who spend more are assumed to have greater economic resources and, therefore, a higher ability to contribute to public revenue. This approach aims to create a fairer tax system by linking taxation to consumption behaviour rather than just earnings.

Key characteristics of the Expenditure Tax:

  • It focuses on consumption patterns rather than earnings
  • The idea is that higher spending reflects a higher ability to pay taxes
  • It is often used to discourage luxury or non-essential consumption

Unlike income tax, which applies to earnings, expenditure tax targets discretionary spending, making it a tool for both revenue generation and economic regulation.

What is Chargeable Expenditure?

To gain a clearer understanding of the expenditure tax, it is important to know the concept of chargeable expenditure. This term refers to the specific types of spending that were considered taxable under the provisions of the Expenditure Tax Act. The tax did not apply to all expenses; instead, it targeted categories viewed as discretionary or indicative of higher spending capacity.

Historically, under the scope of this Act and related consumption-based frameworks, the following categories were typically classified as taxable:

  • Spending on Immovable Property: Costs related to purchasing, building, repairing, or improving real estate were included under taxable expenditure. This covered activities such as renovation, structural upgrades, and restoration work.
  • Entertainment and Leisure Activities: Expenses incurred on recreational activities, such as cinema outings, live events, or similar forms of entertainment, were considered part of the taxable spending base.
  • Overseas Travel Expenses: Money spent on international trips, whether for personal vacations or professional purposes, also fell within the scope of chargeable expenditure.
  • Hospitality Services: In the context of the 1987 Act, this specifically refers to payments for hotel stays (where room rates exceed ₹3,000) and premium dining services.

Applicability of Expenditure Tax in India

Understanding the applicability of the expenditure tax in India is essential for both service providers and high-end travellers. Unlike GST, which is a broad-based tax appearing on almost every bill, this specific tax is far more selective. It does not target every consumer; rather, it is strategically designed to apply only when specific luxury thresholds are met within the hospitality sector.

According to the Expenditure Tax Act, 1987, the tax is not triggered by the mere act of entering a hotel, but by the daily cost of the accommodation provided. Here is a breakdown of exactly when and where this tax becomes applicable:

The ₹3,000 Threshold Rule

The applicability of this tax is not universal; it is strictly determined by the premium nature of the establishment. The primary trigger is the room rent.

  • The Limit: The Act applies only to hotels where the daily charges for a unit of residential accommodation are ₹3,000 or more

  • The "One-Room" Rule: If a hotel has even a few rooms priced above this threshold, the provisions of the Act can come into play for the chargeable expenditure incurred by guests staying in those specific high-value units

  • Assessing Accuracy: To prevent tax evasion, an Assessing Officer has the authority to verify if room charges are being understated (e.g., by shifting room costs into food or service bills) to stay below this ₹3,000 limit

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Did You Know?

The first Expenditure Tax Act was introduced in 1957, based on the ideas of Nicholas Kaldor, making India one of the few nations to ever implement it

 

Source: The Hindu

 

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Where is it Applied?

Once a hotel crosses the ₹3,000 room-rent threshold, the tax is levied on the chargeable expenditure, which encompasses all payments made for premium services. This includes luxury accommodation, dining and amenities (like food, drinks, health clubs, and spas), and event hosting for business or social functions. Essentially, any spending related to the hotel’s premium infrastructure or on-site specialised services falls within this taxable scope.

How is the Tax Structured?

The levy is divided based on the specific type of service consumed. To differentiate between hotel stays and premium dining, the Act followed a dual-rate structure:

Category

Tax Rate

Description

Hotel Accommodations

10%

Charged on the total payment made for residential stays and related room services

Dining & Luxury Services

15%

A higher rate is applied to payments made at specialised restaurants or for premium amenities like health clubs

Examples of Taxable Expenditure

To understand the expenditure tax in India, think of everyday situations where spending is clearly on the higher side. For example, if someone stayed in a luxury hotel where the room rent was above ₹3,000 per night, the limit set under the Expenditure Tax Act, the stay would attract tax. So, if the total room bill came to ₹20,000, a 10% expenditure tax would add ₹2,000, and if they spent another ₹5,000 on dining, about 15% (₹750) could be added as tax.

In another case, imagine hosting a grand wedding or corporate event at a premium venue costing around ₹10 lakh. If the applicable expenditure tax rate were assumed at 10%, the tax component alone would come to about ₹1 lakh, increasing the overall cost of the event. This type of high-value, non-essential spending was targeted to ensure that individuals with greater spending capacity contributed proportionately more in taxes.

Summing Up

As India works toward its vision of becoming a developed economy by 2047, the idea behind expenditure tax, taxing higher spending rather than income, continues to remain relevant. Although the Expenditure Tax Act, 1987, is no longer widely used, its underlying principle is still reflected in modern tax policies that aim to balance economic growth and fairness.

In simple terms, the concept ensures that those who spend more on luxury consumption contribute proportionately more to public revenue. For taxpayers, this highlights an important takeaway: building savings and investing wisely not only supports long-term financial goals but can also help manage overall tax exposure more effectively.

Glossary

  1. Chargeable Expenditure: Any payment made to a hotel for accommodation, food, or other services that meet the criteria for taxation
  2. Threshold Limit: The minimum spending level beyond which the tax provisions became applicable
  3. Assessing Officer: A tax authority responsible for verifying compliance and ensuring correct tax calculation and reporting
  4. Tax Liability: The total amount of tax payable by an individual or entity based on applicable rules and thresholds
  5. Tax Base: The total amount of assets or revenue that a government can levy a tax on; in this case, it is the amount spent
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FAQs

The service provider (such as a hotel manager or restaurant owner) is responsible for collecting the tax from the customer at the time of billing and depositing it with the government.

As per the latest GST Council recommendations, hotel rooms with tariffs of ₹7,500 or less per night are taxed at 5% GST without Input Tax Credit (ITC). This replaced the earlier structure, where such rooms attracted 12% GST with ITC.

Taxing expenditure is often seen as fairer to savers. It rewards those who invest their money back into the economy while taxing those who take resources out of the economy for personal luxury.

Historically, payments made in foreign exchange were often exempt from expenditure tax to encourage tourism. Under GST, however, standard rates usually apply regardless of the currency, though specific "Tax Refund for Tourists" (TRT) schemes may apply for goods.

The hotel or service provider can face significant penalties, interest on the unpaid amount, and legal action for non-compliance.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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