June 27, 2017

Professionals from the accounting and financial industry as well as the tourism industry share their insights on the GST taxation that is just round the corner.

The Goods and Services Tax (GST) that is slated to come into effect in the country from 1 July this year, has set a host of concerns, speculations and suppositions as to what the new tax structure would entail for businesses and the consumers alike across all spheres. Experts and professionals in accounting as well as the travel industry talk about what to expect and how the industry can prepare itself for the new change.
Om Prakash, Director, In ORBIT Tours Pvt. Ltd., Mumbai, says, "We welcome the initiative of the Government to simplify the tax structure on an all-India basis for all commodities and services. The objective of introduction of the GST is to rationalise the tax, to generate higher revenue and to encourage the business community and the people of India at large, especially from the travel trade angle."

When asked if the GST is designed to meet the above objectives or is it designed to increase the tax revenue, Om Prakash reveals that a large number of personalities from travel fraternity have been expressing their concern about the outcome of GST. "There has been a mixed reaction so far. However, the majority members are concerned that GST will impose additional burden on the travel trade, which will impact in a negative way, hence the objectives of Govt. is a one-way traffic to increase tax revenue and not to encourage the travel industry."

"It is evident that the travel trade and the hospitality industry will have to bear with additional taxation burden. This in no way will provide any boost but it will certainly impact the travel trade as a whole and the tour operators in particular. The upper limit of hotel rooms at Rs.5000/- is in no way suitable to the travel trade. Therefore, the inbound tour operators will be compelled to cost their hotels in the 28% tax bracket. This will make the Indian inbound much expensive compared to the competitors of neighbouring Asian countries. In long term the inbound travellers will select the countries with competitive cost and with better facilities, thereby make India as their un-preferred choice."

In his longstanding career of over 40 years in travel trade and having travelled all over the world, Om says that he is unable to understand as to why our policy makers and Government administrators miss the business angle and why not they put them in the shoes of the travellers, who have ample choice of countries and destinations to choose from. "Our Government is interested to squeeze the travellers and travel trade to collect more revenue, but ignore the fact that multiplication of tourists’ numbers can generate more revenue even at a lesser rate. It can increase India’s foreign exchange earnings and can create higher employment."

"As a result of GST application at its declared rates will make travel, hotels, transport more expensive. A small country like Thailand gets one million Indian travellers, so is Dubai and Singapore. France gets 80 million inbound tourists. Our Indian figures are 5 – 6 million even after 70 years of Independence. Why are such figures not noticed by our tax experts? Why don’t they accept the challenge to increase our inbound from 5 – 6 million to at least 20 million? Just imagine the revenue figures even at a reduced rate for 20 million tourists."

He does not foresee a good future for the travel trade with the imposition of GST and says that they would have to actually struggle hard for their existence. "I hope that the experts in Government will view the tax collection in a broader angle and device GST which can provide a boost to the entire travel, hospitality and aviation industries.

CA. H.M. Talha Rahman, Partner, Selvarajan & Co., Chartered Accountants, Chennai, spoke at length about what GST would mean for the country's economy in the long run while giving a very accurate and deep understanding about the computation involved for the travel industry.

"There is a big hue and cry about GST and people are speculating a lot about this. What we fail to understand is that it is a combination of most of the indirect taxes in a new form, which brings the concept "ONE NATION ONE TAX".

Explaining how several countries had long adopted GST, he recollected his experience of awaiting a refund of GST 15 years ago. "The GST was implemented successfully by few countries many years ago. I remember having waited in a queue in Singapore Airport for a refund of GST 15 years ago. At that time, Indians used to shop a lot in Singapore which was popular for tape recorders, VCRs, perfumes and other fancy stuff. When we buy them in Singapore, the cost of the item comes with a component called the GST which had to be paid by the local residents as final consumer. But a foreign national could claim the refund of GST paid, by showing the bill and goods at the time of departure from the country. Hence It is called a consumption tax."

However, Talha Rahman reassures that this is merely a consumption tax that has no cascading effect. The 'Cascading Tax Effect', as he calls it, simply means tax on tax. "Previously when a manufacturer sells his product, he added Excise Duty with his selling price and sent the goods to the distributor. In turn when the distributor sells the same goods to the end user, he adds his profit margin and also charges VAT on the added prices which includes Excise Duty. In other words, a tax (VAT) is paid on another tax (Excise Duty), which has cascading tax effect. Now in the GST era, in this example, both Excise Duty and VAT is clubbed as GST and the GST charged by the manufacturer to the distributer can be adjusted as ITC (Input Tax Credit) thus avoiding the tax on tax."

To explain the concept in simple terms, let us assume that a distributor called "B" buys 1000 units of a product from a manufacturer called "A" at a price of Rs. 100 per unit. The Invoice by A will look like this:

SlNo Description No of Units Unit Price Total Amount
1 Sale of Product 1000 100 1,00,000.00
2 GST @ 12% 12,000.00
3 Total Invoice Amount 1,12,000.00
(In this example, A collects Rs. 12000 from B as GST and pay the entire amount to the Government)

Now let us again assume that B sell all these products to a retailer called "C" keeping 5% as his profit margin and his selling price will be Rs. 105 per unit. The Invoice of B will look like this:
Sl.No. Description No of Units Unit Price Total Amount
1 Sale of Product 1000 105 1,05,000.00
2 GST @ 12% 12,600.00
3 Total Invoice Amount 1,17,600.00
(Now B Collects Rs. 12600 from C as GST, but he will not pay the entire amount to the Government, instead he is allowed to deduct Rs. 12000/- which he has already paid to A as GST and pay only the balance amount of Rs. 600 to the Government. This credit of Rs. 12000 is called ITC, Inward Tax Credit). If you notice in the above example, tax is not levied on tax and hence GST will not have any cascading tax effect.

Talha Rahman lists the seamless flow of "Input Credit" (please refer the example above: Rs. 12000 paid by B towards GST to A is ITC of B) as one of the greatest advantages of GST across the chain and across the country. All taxes (GST) paid to a registered dealer for the purchase of goods (including capital goods) and supply of services can be deducted as ITC from the GST collected from your bills and the balance tax only need to be paid as tax.

Nonetheless, he says that there are few exceptions, for example, the GST paid on Motor Car or Motor Cycles etc by the non-transport businesses cannot be used as ITC.

Delving deeper into the tax structure, he says that the compliances mechanism of GST is going to be a major roadblock for small traders and service providers. "Every registered dealer has to file three returns in a month and one annual return making the total number of returns to be filed as 37 per annum. These returns are to be filed electronically in a platform called GSTN (GST Network) and requires tremendous knowledge, accuracy and skill. It is absolutely difficult, if not possible for small timers to comply with these requirements on a monthly basis. It is strongly advised to use the services of Chartered Accountants or Tax Return Preparers appointed by the department."

Relief to small traders and service providers
Small Manufacturers, traders, dealers and service providers whose turnover does not exceed Rs. 20 Lakhs in a financial year are exempt from the registration and payment of GST.
Composition Scheme: Those small traders whose turnover exceeds Rs. 20Lakhs but below Rs. 75Lakhs can opt for the Composition Scheme which allows them to pay GST at a lower rate to be fixed by GST Council, which will not be less than 1%. But they cannot avail ITC and they cannot undertake any inter-state transactions.

Unfortunately, the small service providers cannot opt for the composition scheme.

GST and the travel and tourism industry -
The tourism industry and travel and tour agents, in particular, are facing a tough time due to various factors like no commission by the airlines, direct marketing of airlines, higher taxation, poor tourist infrastructure etc. Their major sources of income are listed below:
1. Commission from Airlines, Cruise Companies, Travel Insurance Companies etc
2. Sale Tour Packages, both inbound and outbound
3. Travel Related Services like Visa, Passport etc.
4. Incentives Received from CRS Companies

Rahman clarified the calculation of GST on the following items -
Commission from Airlines, Cruise Companies, Travel Insurance Companies etc:
1. One has to understand that an airline or a cruise ticket or the travel insurance policy issued by insurance companies is a contract between the airline/cruise/insurance company and the passenger. The travel agent is only a facilitator who receives commission from the companies. Hence GST on these ticket/policy will only be consumed by the passenger and the agent cannot use them as their input credit.
2. However the agent has to pay GST on the commission received from the airline/cruise/insurance companies on the reverse basis. (For Example, if the GST is 18% and the agent receives Rs. 100 as commission, he has to pay only Rs.15.25 (100-100/118%) as GST). This amount of Rs. 15.25 should not be collected from the passenger.
3. If the agent collects Service Fee as an additional charge from the passenger and show it in the invoice separately, he can add GST on the service fee in the invoice and collect the same from the passenger.

Sale of Tour Packages, both Inbound and Outbound:
1. Only outbound tour sold to a foreigner for visiting another foreign country and the payment is received by convertible foreign exchange is exempt from GST. All other tours (including inbound tours for foreigners) are taxable.
2. GST paid on the purchase of tour packages from another tour operator can be claimed as ITC and only the difference tax can be paid to the Government.

Travel Related Services like Visa, Passport etc.
1. All government fees and consular charges paid on behalf of the consumer/client is outside the purview of GST
2. Service Charges on the above services should be subject to GST which can be collected from the end consumer.
3. If the services are outsourced from another service provider (For example a travel agent from Chennai has to outsource a Delhi Agent to get the Visa for Uzbekistan), GST paid on the Delhi Agents Invoice can be claimed as ITC and only the difference can be paid to the Government.

Incentives Received from the CRS Companies:
1. Incentives received from CRS companies attracts GST, which has to be borne by the travel agent.
2. Like the commission receive from the airlines, GST on this also can be paid on the Previously we did not know the exact percentage of the excise duty that we would pay. Now it is not like that. GST is an excellent thing. GST has got both Goods and Services.
– one nation one tax. All excise and other taxes have been absorbed. Certain services, at the outset, may not look like service but have been asked to consider as services.

All said and done, a lot of clarity can be expected only after the system comes into effect next month. In the meanwhile, Rahman suggests that it is better initially to engage the Chartered Accountants than tax consultants. "They can go through CAs or Tax Return preparers recognised by the department. Even the tax consultants and CAs are taking time to understand the GST. Tax consultants who are usually retired persons from the VAT dept will take longer time to understand and will rely on their practical exposure on trial and error basis."

Aashish Gupta, Consulting CEO, Federation of Associations in Indian Tourism & Hospitality (FAITH), too, shares a similar opinion as Rahman about the industry awaiting more details once the taxes are rolled out. "The GST Council agreed for a special rate for tour operators which was 5% and also for tourism cab operators (tourist taxis). The Ministry of Finance had recommended 28% for those hotels whose tariffs are above Rs. 5000 per room night. Let us see when more details come after the tax is rolled out. For the past few years, associations like the Travel Agents Association of India (TAAI) and the Enterprising Travel Agents Association (ETAA) have already been discussing with the government over the rates. The current rates fixed for the hotel industry are slightly unfavourable, while it is okay with the rates for the rest of the travel industry. GST involves a lot of internal calculations and there is something called as effective rate which would go up for some and reduce for the others. The rate for tour packages is proposed at 5% at the moment but it is not fixed yet."
"I believe different associations have been running sessions for its members with the help of Chartered Accountants, tax consultants and tax lawyers. The computation of GST is different with a lot of processes aligned to it. The good side of the taxation is that the industry will become more organised and there will be a lot more structure as every invoice will be reported."
Model policies

When asked about the tourism-related models of other countries that India can incorporate in its policies, Aashish says that there are different benchmarks for each value chain, by way of infrastructure development , direct and indirect taxation, global marketing practices, etc. which the state and central governments do consider. "We have hundreds of examples of benchmarks like monument management, road connectivity, technology, to name a few. In order to grow, one has to learn the good practices. The government do listen to them but it would be great if they are all implemented."

Global changes
Commenting on the impact of volatile global situations following changes and decisions made by international governments on the industry in India, he said, "Recent happenings like the ban of electronic devices in the cabin luggage in flights, the decision on H1B visas for Indian professionals, demonetization of currency, etc. have affected the decisions of the travel industry in our country as well. Every country tries to do its best for its citizens, in which case any industry must be very quick and capable of understanding the change. Their business models must be flexible enough to learn about risks and be aware of what is happening in the source market, the destination market, technology and security issues, etc. Having said that, every country in the travel business is alert to external and internal risks including currency fluctuations, security and technology changes, economic cycles and so on. The industry must re-think their business models to make them sustainable."


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