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Monday, 16 January, 2017, 19 : 00 PM [IST]

Decision to amend Service Tax rules draws flak from industry

The Union Ministry of Finance’s latest amendment to its earlier notification on CENVAT Credit and Service Tax relevant to the travel and tourism related services has received a unanimous thumbs down from the industry. Amending the earlier notification on June 2012 partially, the Department of Revenue under the Ministry of Finance through its latest notification dated January 12, 2017, has made two important changes to the existing rules.

  • CENVAT Credit on inputs and capital goods used for providing the taxable service, has not been taken under the provision of the CENVAT Credit Rules, 2004, and
  • The bill issued for the purpose indicates that is inclusive of charges of accommodation and transportation required for such a tour and the amount charged in the bill is the gross amount charged for such a tour including the charges of accommodation and transportation required for such a tour.
With Service Tax applicable on the gross amount from January 22, 2017, combining all the components of services including transportation, accommodation, etc., the cumulative impact of Service Tax on tour packages is expected to go up to 9%. This, the industry stakeholders feel will make their services uncompetitive for their customers, ultimately creating a huge slowdown in the industry, which is already struggling for survival. 

INDUSTRY REACTS

Subhash Goyal, former President, IATO
It’s very unfortunate that while we were expecting a tax cut in the aftermath of the demonetisation, the government has increased the Service Tax for the travel industry. This will make the travel industry uncompetitive. Moreover, this action of the government is totally discriminatory as the export segment which earns foreign exchange for the country is exempted from Service Tax. I will urge the IATO to look for a legal recourse against this move.

Mahesh Iyer, Chief Operating Officer, Thomas Cook (India) Limited  (Mumbai)
The impact is two-fold: a resultant doubling of the tax rate on the sector, and given that implementation is within a week, reaction time as well as time for advocacy is negligible. This will see a corresponding increase in tour pricing, which will in turn be passed onto customers. Impact on outbound tours as the effective tax rate moves from 4.5% to 9% as no input credit is available for indirect taxes incurred outside India.

Domestic and inbound tours: With the increased tax rate, India tourism, which is still at a nascent stage will see impact. Ability to claim credits on input services may not be commensurate the increased taxes, thereby impacting price to consumers.

Hotels through tour operators may get impacted with the removal of the 1.5% effective rate to tax margins – now, entire accommodation to be taxed, with input credits. Passing of such credits may be a challenge as the hotel sector is largely unorganised. Therefore, clarifications should be issued explaining the amendments and their intent to avoid future tax disputes and litigation."

Brijesh Modi, Head-Finance & Commercial, SOTC Travel (Mumbai)
On holiday packages (bundled services), due to the changes in the taxable services from 30% to 60%, the effective Service Tax rate will see an increase from 4.5% to 9%. On hotel accommodation, services provided by travel agents, the current rate of Service Tax is 1.5%, and is expected to increase and we are seeking the clarification on the same. On transport services provided by travel agents, the current service tax rate will remain at 6%. Therefore, the above change in Service Tax rate will increase the selling prices of holiday packages.

Sriram Rajmohan, CEO & MD,Club7 Holidays Ltd.
The Service Tax has indeed gone up from 1.5% to 9% on pure hotel packages and from 4.5% to 9% for tour packages.  This is a huge jump from the existing tax structure.  While the tour operators will now have to pay a higher tax, they will also stand to benefit from this as they can now take set-offs in the form of CENVAT credit. I feel this increase is a preparatory measure for the industry to embrace the GST at a much higher percentage for 14-18%. This increase is going to affect the retail travellers more than the corporate MICE travellers as the  corporate can  claim the input credit on the taxes paid, while for the individuals, it is going to increase the cost of their travel.


Arun Verma, Allways Travel Services (Delhi)

This move by the government will spell total disaster for the travel industry in the country. There has to be certain logic behind any tax.  This is equivalent to throttling an industry which is already in the grip of a downturn. Who is going to pay 9% service Tax and take service from us when industry wide margins are as low as 1.5 to 3.5%.


 
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