This is nothing to do with hotels, its specific to state laws - in Delhi, Tamil Nadu, Gujarat for sure (and maybe Karnataka)... Regardless of the rate you pay, one of the two applicable taxes is calculated on the rack rate paid on the room type occupied (lets say you book a standard room and are upgraded to a club room - someone, either you or the hotel, will pay the tax on the upgraded club room rate). These are logged by room number with the state tax authorities so there is very little the hotel can do.
I've had situations at HR Delhi where the taxes I've paid have been higher than the room rate when upgraded to a suite. Unfortunately this is another example of outdated Indian bureaucracy - and the hotels do not benefit from it. It makes changing rates and actually using dynamic pricing which is a great tool to maximize revenue and helps with last minute deals or advance purchase discounts - nearly impossible. I've had conversations with many a GM in affected cities and all have tried on various occasions to use the example of airlines and dynamic pricing to update this archaic law, but to no avail.