The Service Tax revision effective January 22, 2017 by the Ministy of Finance has the industry in a tizzy. The first reaction from the average travel agent is, “I am confused.” What was earlier an easily interpreted law, or an easy tackle has suddenly turned into a googly that few can attempt. While the bigger travel agent is absorbing the incremental 4.5 per cent tax, the smaller agent is in a quandary wondering how to deal with the present situation and near dreading the GST. TravelScapes stands by the community as it talks to agents big and small, inbound and outbound, to understand the implications of Service Tax increase and what to expect from GST.
While earlier the effective tax slabs for the travel industry were 1.5 per cent for hotel bookings and 4.5 per cent for tour operators, effective January 22, 2017 it is at a flat nine per cent across categories. The challenge does not end here, by the time the agent grapples with this change and adjusts to it, GST shall be effective in four months. Guldeep Singh Sahni, President OTOAI sums it up with a touch of cryptic humour,”It is just a small sparkler that the Government has thrown our way to test our reactions before the actual missile hits us.” There maybe more truth to the statement than is evident. Pronab Sarkar, President, IATO shares a similar sentiment, “For the time being it is very difficult to tell our overseas agent that Service Tax has changed and then four months later we shall have to again go back and tell them that now GST is applicable. Hence most of us are trying to absorb the impact of the differential 4.5 per cent.”
While the impact is hard on the trade as a whole, there are different implications for inbound and outbound operators.
There are two challenges for the inbound operator essentially. The first which is valid for both Service Tax and GST is the risk, rather compunded reality of becoming unviable.It is double whammy for India inbound, which was in any way suffering in the earlier tax regimen itself was making India as a destination more expensive vis a vis destinations like Thailand which not only are proving to be cheaper but also have better infrastructure. The nine per cent tax makes the situation even more worrisome. The competition is not only from outside the country but also within, as tour operators become more expensive, people are shifting their business online. “People shall shift their business to OTAs who are working on a different model altogether and are positioned as pure agents working on commissions. While OTAs are paying 15 per cent on their earnings, agents are paying nine per cent on the total invoice. We as tour operators shall have to see what model to adopt in order to survive,“ shares Sarkar.
Survival shall continue to be a challenge as GST brings with it trials of a different nature. The premise that makes GST viable for all concerned is that businesses would be able to avail GST credit not unlike CENVAT. The critical question, however, is the how of it.
IATO along with other tourism associations is in consultation with some of the best financials consultants in the country such as Ernst & Young to find a way out and is also hopeful that something positive shall come out of its various meetings with the Ministry of Finance.
“It is not so much GST which is a problem but the long-winded complicated application that is a mammoth task for tour operators. While to the Government it is “one country one tax”, for us it would mean multiple registrations, multiple bills, and multiple actions. Since the location of the service shall have to be the location of the tax payment, we have to register in that particular state to claim GST credit. This means tour operators have to open either an office in those states or at least raise an invoice from there,” Sarkar shares.
Sarkar feels that while tax payment is not an issue but refund needs to be an on-ground reality rather than just a promise on paper. He further illustrates a case in point when he says, “In case of hotels if you are booking hotels in different states, you are blocking your money for three months till such time that you get a refund and small operators cannot afford to block that kind of money.”
As Sarkar is hopeful that the representations to the Ministry of Finance shall bring some positive results, he also admits that the situation is much worse for outbound agents. “Even with nine per cent service tax, Indian outbound agents are out of the price,” Sarkar shares on a rueful note.
Taking a leaf from Sarkar’s statement we spoke to other operators who anonymously agreed that outbound travel as a business was on the brink of dying if the Government did not revise its stand and revisit the tax structure.
Guldeep Singh Sahni, President OTOAI opines that even before the ST revision, the tax was too high, “The outbound tour operators were operating under two categories, those selling only hotels and paying an effective Service Tax of 1.5 per cent after an abatement of 90 per cent and the tour operator who was paying it at effective 4.5 per cent post a 70 per cent abatement. Right since that time, we have been petitioning to the Government that it is too high as the intention of the GOI is to abate the part that is not taxable and tax only on profit. We are not at 30 per cent profit, our profit is less than five per cent.”
Sahni feels that the Government’s methodology of surveying the situation may be missing some critical factors. “The Government is basing its study on big operators who are advertising in papers offering ten to fifteen or even twenty per cent discount. Being bulk operators, they already have preferential rates from airlines. The retail operators who form 85 per cent of the industry are competing with them, so they have miniscule margins which are less than five per cent while selling a product.”
He feels that while the 4.5 per cent was already troubling them, the increase to nine per cent might just be the deathblow.
He goes on to say that the fear of GST stems from the assumption that the tax structures and specially the new notification indicate a lack of communication with the ground level operator. “No Government agency has communicated with the retailers and the studies are based on select big operators,” claims Sahni. Should the Government get directly into dialogue with OTOAI, it shall resolve a lot of issues.
Sahni elaborates that at a tax of nine per cent, the outbound operators become unviable as they cannot claim CENVAT as credit of taxes already paid in another country cannot be availed here. Since they are already working at a minuscule margin of less than five per cent, the nine per cent tax means that they pay from their own pocket.
He further says that the Government is welcome to come and assess their balance sheets to get a true story and the nine per cent tax would only result to measures like people taking money on the BTQ quota and paying for the service/product in that country itself.
Sahni strongly feels that it is the retailer who is most affected and it is with this segment that 85 per cent of the outbound business lies. He says that this industry, which is employing lakhs of people, is being adversely affected by the notification.
He says the Government should look at the revenue the segment is generating, “Whatever we are streamlining, we are earning revenue for the Government. Every tour operator is registered with the service tax department and paying income tax.”
Sahni appreciates the Government’s intent but feels that it is missing out on the adverse effects of its policies. He feels that the move might be an attempt to net the non-tax-paying Indian who is travelling abroad. He goes on to say that an employment generating industry should not be penalised if certain people are not paying taxes and went on to assure that the outbound operators are willing to share whatever information is required by the Government from their end.
He emphasises, “With this move the Government shall gift this revenue and employment generating industry, which is present in every Tier I and Tier II city across India, to agents sitting outside the country. These are people who are quality operators, doing business above board and it is time that the Government sits down and gets into dialogue with us to understand the adverse effect of this on us.“
He feels that people shall find ways to travel and evade taxes via legal channels, the best option for the Government is to partner with these operators rather than taxing them at a rate that makes them ineffective. “The tour operator in India is Government’s best source to tap these people and if they channelise this business and make them their partners, rather than penalising them; a lot that the Government wants to accomplish can be accomplished and it will not impact this industry rather give it an impetus.” He says that the 88-89 NTOs in India are spending millions on dollars in the country to advertise their products. Outbound is generating more Forex than the inbound industry and it is direct money coming into it.
He concludes by saying that since we get no tax refunds, even the earlier 4.5 per cent was higher and if abatement is given up to 90 per cent and only 10 per cent is taxed, it shall streamline everything in this business and everybody shall be happy to pay the taxes and the business shall be streamlined.
Sunil Kumar, President TAAI, also feels that the Government needs to implement GST after giving due consideration to the travel industry, “Right now we are all very fluid on GST issues, the directions are not clear, there is a lot of ambiguity in the air. There have been meetings after meetings but nothing is emerging, we are all going in a state of guesswork. It is important for the Government to ensure that GST does not make an Indian agency less competent than a global agency. Someone located out of India should not grab all the business, and if that happens – which we feel shall happen in a big way; it shall be a disaster. So we do not desire that GST should, in any which way, take away the strength of a travel agency merely because it is located in India. With online and technology coming in so strongly, I think those stakeholders having their offices outside India shall stand to gain by virtue of online trade, online marketing and customers would shift business to whoever saves them cost. So the Government loses, travel agencies lose and the business goes to somebody else. This is one area that the GST needs to look into.
Further GST needs to be an improvised version over Service Tax, that implies that GST cannot be more complicated than Service Tax. It has to eliminate a lot of barriers that we have to face in Service Tax and that is what we are looking at. More when we get details on Service Tax, we do not know whether it is 18 per cent or how much. We are still working on presumptions and consultants. Let us try and make things, easier, traveller friendly for the Government and for the agencies,” opines Kumar.
None of the online travel agents responded to our queries when we contacted them.
All said and done it is the small operator who is the most affected and feels the impact.
Jatinder Singh Bhatia, Managing Partner, Travel Experts says, “ The recent Service Tax increase of 100 per cent from 4.5 per cent to nine per cent in case of package tours and 500 per cent from 1.5 per cent to nine per cent in case of only hotel bookings was indeed a very bad news for the travel fraternity, especially for the outbound tours since there is no CENVAT credit available in case of outbound tours. It was indeed a very surprising move by the Government at this stage, which may have lead to many small and medium sized travel and tours companies to close down, since they have now become uncompetitive, as this Service Tax is not applicable to OTAs who are registered out of India. We are now keeping our fingers crossed and hoping that the proposed GST which will soon be introduced by the Government. should be in favor of the travel and tourism industry, with a lower slab of GST and with CENVAT credit available.”
Shefali Jain Mishra, Founder, Kare Voyage, a travel agency that specialises in Senior Citizen Travel says, “Inflated Service Tax means that either we absorb it or pass it on to the clients. Since we serve only elderly citizens, who have limited budgets and are cost conscious, we might have to absorb the service tax in our wafer thin margin to keep serving our niche customers.”
The intentions may be right but the implementation and execution are different stories. The amendment in Service Tax merely months ahead of GST seems a little unnecessary.
To take a converse view of the situation, the amendment in Service Tax is one of the better things that has happened to the Travel and Tourism industry in India because the industry now has woken up to what could happen when the GST is actually implemented. The semi-complacent industry, which had had adjusted to the existing Service Tax laws –fair or unfair– has gotten a rude shock post the amendment. As the GST is likely to be at least a three per cent or most likely nine per cent higher and given that a lot of segments cannot avail GST credit; it’s a really tough situation.
The Ministry in the view of its quest for a larger good, may be missing out on some crucial elements and “one country one tax” may actually severely injure, some of the geese it was hoping to get Golden eggs from.
The Government needs to learn its lessons from demonetisation and look into both industry and segment-specific unique challenges, and make special provisions and amendments in the fine print of GST.
While a lot of experts rightly say that the focus on infrastructure and technology shall benefit the tourism industry in the long run, the critical question is would tourism industry survive such blanket taxation?
On a positive note, negotiations are on and associations are hard at work, trying to sensitise the Ministry of Finance on the unique nature of industry and its challenges. There is hope still, that the Ministry would pay heed and make the necessary amendments. After all, no battle is lost, till it is lost!
As the Indian Tourism Industry grapples with the amendment in Service Tax and prepares to bide over the pre-GST change in various ways; it does so with a decided sense of bewilderment and concern at what is and what shall be. Aashish Gupta, Consulting CEO FAITH, in conversation with TravelScapes helps demystify the latest Service Tax amendment, its challenges and implications, the changes expected post-GST as well as the recommendations made to the ministry of finance with request for support from Ministries of Tourism and Commerce.
SERVICE TAX AMENDMENT
Before the change on January 12 there were two abatement categories available To tour operators. The tour operator could claim an abatement of 90 per cent on hotel bookings and hence paid an effective service tax of 1.5 per cent while a person who packaged a tour was being effectively taxed at 4.5 per cent on an abatement of 70 per cent. Post the amendment effective January 22, 2017, both these categories have been merged and the abatement has been reduced to single abatement of 40 per cent making the service tax across categories at nine per cent. This is accompanied by CENVAT credit wherever available on the input service taxes paid .
The small and medium domestic operators will find it difficult to get suppliers to issues invoices with a service tax break-up and hence cannot may not be able to claim cenvat credit. The outbound operator which was earlier paying 4.5 per cent tax is now paying 9 per cent. However he cannot claim any cenvat credit on international invoices. This makes them uncompetitive in the global market.
Medical Tourism and tour operators in J&K as are exempt from Service Tax. Hence if a tour operator is selling medical tourism as a part of a package, he cannot claim CENVAT credit. Similarly, an adventure tour operator, for whom J&K is a major market, cannot claim CENVAT credit as the state services are in exempt category. However he will pay the central government at nine per cent, as against 4.5 per cent making him even less viable than the agent selling out of J&K. The adventure tour operator also acquires services from the unorganised sector such as guides, Sherpas, pony men, helpers who do not issue invoices and hence the adventure operators cannot claim CENVAT credit on the increased levy of service tax
Airlines if bundled in a package at nine per cent prove to be extremely expensive and hence need to be billed separately.
MINISTRY OF FINANCE RESPONSE
Representation and detailed discussion has been held with the concerned officials at Ministry of Finance and a positive outcome is awaited.
The Goods and Services Tax that shall be a single, comprehensive tax across India, to replace taxes levied by the central and state governments on manufacture, sale and consumption of goods and services. GST would be levied and collected at each stage of sale or purchase based on the input tax credit method, allowing GST-registered businesses to claim the tax credit to the value of GST they paid on the purchase of goods or services.
The GST which is expected to be implemented from the month of July this year shall have four slabs of five per cent, 12 per cent, 18 per cent and 26 per cent. The services slabs as defined are either 12 or 18 per cent.
As GST credit can be claimed in the same way as Service Tax, all issues that are currently applicable to Service Tax and highlighted above shall continue on the implementation of GST. Also, given a higher tax slab, it shall make travel more expensive.
Another challenge is that with “one country one tax”, to claim GST credit for a state, an operator needs to be also revenue compliant with that particular state to claim credit. The challenge is that an all India operator, especially a small one shall find it cumbersome and unviable to claim credit as he shall have to comply with every state he avails services from.
All outbound operators to be exempt from GST as their suppliers are not governed by Indian taxation laws.
As inbound operators earn in Forex, they should be treated like other exporters and be exempt from GST.
Similarly, given the fact that GST shall not be applicable in J&K or for the unorganised sector, Adventure Tourism should be exempt from GST on these levies.
Medical Tourism should also be given exemption from GST
FAITH recently conducted an intensive brainstorming with all its 10 associations members stakeholders to discuss all issues in detail.