The Federation of Associations in Indian Tourism & Hospitality (FAITH), the collective forum of travel, tourism and hospitality industry associations in the country, in a letter to the Finance Ministry, has sought immediate intervention of the government to amend provisions in the department notification dated January 12 on CENVAT credits and Service Tax applicable to tourism industry which makes travel and tourism services offered by Indian travel agents and tour operators non-competitive. Sharp reduction in abatement rates ranging from 40% to 90%, and multi-fold increase in taxable value of travel products and packages as a result of the amendment would “impede and erode” the growth of the industry in the country, FAITH said.
While the intention of the notification, which made effective from January 22, is to allow the benefit of CENVAT credit of input services for the tour operators and hence decrease the effective tax rate, FAITH enumerating reasons said that there will not be much CENVAT credit now be available for the tour operators or travel agents with the implementation of this notification.
In case of an outbound tour, majority of input services are procured from outside India which are in the nature of performance based services. Since these services are performed outside India, no service tax is presently levied or paid in India. Thereby, allowing credit on input services would not significantly benefit the industry, FAITH points out. Therefore, the recent amendment has doubled the effective rate of tax without a significant corresponding benefit of CENVAT credit.
“Owing to the business model, there are challenges in availing the credit even in domestic/ inbound travel. The industry works on a Principal to Agent model rather than Principal to Principal model. What this means is that the tour operator rarely holds the inventory of airline seats or hotel rooms but only bills them as an agent to the customer. The income earned by him is, in most cases, the commission given by the airline or the hotel, as the case maybe. In effect, the invoice/ ticket is issued in the name of end consumer and not the travel agent, since the travel agent is not the beneficiary of such service,” the letter notes. Therefore, allowing CENVAT credit with simultaneous increase in tax rate does not resolve the issues for tour operators and travel agents, but only compounds it.
FAITH also raised ambiguities in the provisions for entitlement for abatement and CENVAT Credit, which would result in “diverse interpretations” by field officers of Service Tax department later on. The federation also asked for exemptions for Medical Tourism, Ayurveda, and J&K packages from the government.
As a recommendation, FAITH has pleaded the abatement available to tour operator should be amended to provide a choice to the tour operator to opt for a lower abatement along with CENVAT credit on input services or opt for a higher abatement without claiming the CENVAT credit on input services.
The federation also sought the intervention of both Ministry of Tourism and Ministry of Commerce in the matter. “With no substantial increase in credit availment, the effective tax rate of tour operators is going to increase. Multi-fold increase in effective tax rate would further aggravate the burden of taxes on the Industry compared to its foreign competitors. This would, in turn, result in business loss to Indian players. It is needless to mention that any business loss to Indian players would adversely hit tax revenue earned by the Government. The Industry works on very low margins in a very competitive environment. Any increase in effective tax rate would lower the margins even further. The industry primarily works as an unorganized sector and there are a large number of small and medium level service providers. Potentially, this amendment could spell doom for the Industry as it would be very difficult to maintain margins and thus, sustain,” the letter noted.