End of taxing times for tourism?

The proposed single tax scheme is like an oasis for India's tourism sector after a long trudge through the desert. The sector, which pays a plethora of taxes but still faces a huge dearth of infrastructure and facilities, is eagerly looking forward to the goods and services tax (GST) regime, which will subsume several layers of levies.

The tourism sector's contribution to gross domestic product (GDP) in India is ahead of almost all other sectors of physical exports and is second only to the gems and jewellery sector, says an IMRB study conducted in 2014. In the net foreign exchange earnings, the sector is at 80%, only behind textiles and pharmaceuticals, IT and ITES, and in employment generation, it is only beaten by the textiles and apparel sector.

Despite that, the study finds that the tourism sector pays a plethora of taxes, but doesn't get any significant benefits compared to other export sectors. Instead, multiple taxes are charged on the same service/ product by the Central as well as state governments.

This is where the goods and services tax (GST) brings hope for the tourism industry, feels Gautam Khattar, partner, PricewaterhouseCoopers. “On the output side, when you stay at a hotel, you're charged multiple (entertainment, luxury, service, etc.) taxes. GST will subsume all these taxes as well as the input/ procurement taxes,” he said.

Today, when hotels buy food, they are charged value added tax (VAT), but can't offset it against the output service tax. Whereas, GST on food will be available as a credit to the hotel and thereby present an opportunity to reduce the cost. This difficulty in fully utilising input credit is not the case with hotels alone. As currently, Cenvat Credit Scheme permits claiming of input tax credit only on certain goods and services, but not on all, tour operators are unable to take full benefit of it.

While GST is expected to improve this situation, whether it will be on the positive or negative side will depend on “what GST percentage is charged to the hotel industry and what value it will be levied on,” adds Khattar.

In developed markets, there is a mechanism called TOMS or tour operators' margin scheme. Cox & Kings CFO, Anil Khandelwal, suggests, “TOMs or tax on actual income can be brought to India and input credit should be available with respect to GST suffered on the cost incurred in India towards such supply. Alternatively, they can have a composite scheme or abatement in the rate of tax to lower the tax burden, in case the full revenue is contemplated to be taxed. And input credit should be available on GST suffered in India on indirect expenses.”

But even if TOMS or an abated rate based on average gross margins of tour operators is given, Khandelwal says, credit for tax paid on administrative services shouldn't be restricted.

“Such lowered rate on tours and presumptive tax on air ticket agency and forex should not be coupled with denying credit benefit, else, travel and tour operators will continue to be in a dilemma about whether to offer a cheaper travel product to customers or think about own profitability,” Khandelwal added.

And for air travel agents, he suggests that the presumptive scheme for discharging tax should continue, as it will aid in determining the value of services, and in the case of intermittent transactions, a tax should only be levied when air travel booking is made. In other words, it should be taxed only once, not multiple times.

Concessions for competitiveness

The World Economic Forum, in its 2013 study of tourism competitiveness, rated India at a low of 65 among 140 countries. IMRB's study also points out that the tax levied on inbound tourism is amongst the highest in the country and a major reason causing India to lose foreign tourists to competing South East Asian countries.

The study also warns that taxing tourism may seem appealing when the bulk of taxes can be placed on constituents, but taxing inbound travel is akin to taxing exports as it erodes competitiveness.

Therefore, while abatements, concessions and differential rates are not ideal to GST, they will be important for the tourism industry to be competitive. Explaining the current scenario, Khattar says, “When you book air tickets, you're taxed at a reduced rate and various incentives are given, for instance, hotels can get liquor duty free or luxury cars for earning foreign revenue at concessional rates, with conditions attached. If incentives are done away with, pricing will be hit and in the end, the customer will be burdened. Therefore, the GST council needs to look at the appropriate value for such bookings.”

To increase competitiveness, he also suggests GST refund for inbound travellers -- something that's practiced in Europe, Singapore and some other parts of the world. “Generally, tourists can claim the refund at the airport itself. But given our federal structure, we'll have to sort out details like where the refund will be made from when a tourist enters the country from Mumbai but leaves from some southern state.”

Globally, inbound tours are charged locally, whereas there is no tax for outbound tours. In India however, both domestic and foreign tours are being charged. As a result, Indian tourists pay tax in India as well as overseas for the tours. Therefore, Khandelwal recommends the global practice to enable Indian tour operators in getting a level playing field when competing with foreign players.

“This is even more important in growing online market worldwide,” he says. The unorganised players getting covered under GST will also give registered tour operators a level playing field in the domestic market.

Certain exemptions though are recommended for the sake of feasibility. While Khattar makes a case for creating a benchmark when taxing hotels as it is difficult to monitor compliance of one-star hotels or ones with room rent less than Rs 1,000-1,500. However, Khandelwal believes monuments, parks, museums, etc. should be exempt because, whilst GST offers seamless credit chain, in many places, the billing system may not be robust enough and customer registrations may not be feasible.

The matter of states

Unlike the current system, where tax revenues go to the point of origin, under GST taxes will be levied at the point of sale or consumption of goods or services. So what happens when a holiday package for Jaipur is purchased in Mumbai? If revenues for tax on Kashmir-manufactured pashmina shawls, sold at luxury stores in Mumbai, go to the kitty of the state of Maharashtra, won't Kashmir lose out?

This was a huge debate that delayed GST — states like Tamil Nadu feared that as manufacturing states all the revenue will go out. Therefore, as per the amendment in the constitution the central government has guaranteed states that their revenue buoyancy will be met for five years. Moreover, at present states do not partake in service tax for say air tickets, it is currently only a central levy, but under the new tax regime, there will be Central and state GST on services as well.

But the problem despite the Central and state GST on services is that considering all states will accrue the benefit from it, the states of origin may still end up with comparatively lower revenues than states of consumption. Something that even Khattar admits is a likelihood.

From a tour operator's perspective, Khandelwal has different concerns. “By the very nature, travel services involve coordination at various travel points. Now with the state and centre sharing taxes, we need clarity on the point of collection of the tax as well as assessments, returns, etc.—a central or clear point of taxation and returns will make implementation easy and meaningful.”

Easing inflation

One of the reasons that most people are gung ho about GST is that while in the short run inflation is expected to hit us, in the long term it should neutralise. Ideally, as per Khattar that should take anywhere between six months to two years. “Today service tax is 15%, GST is to be 18%, but with benefits to industry through a reduction in procurement costs and some push from government — players will have to re-look at their pricing and that is where the inflation should go down. The government too may tweak interest rates to regulate inflation — Malaysia had laws ensuring prices don't go up when they introduced GST last year. India being 10 times – 20 times bigger, may not be able to do that but certain measures will be taken to keep inflation under control,” he said.

As per World Travel and Tourism Council's (WTTC) forecast for 2023, the total inbound tourists will be 13,699,000, thus generating Rs 1,892 billion, a 5.7% increase over the 10-year period 2013-23. Therefore, whatever the GST council does, it should not take the tourism industry lightly.