The tourism sector could be one of the worst casualties of the government’s decision to hike service tax to 14% from 12.36%, with everything from flight tickets and hotel stays to amusement park trips slated to become more expensive.
Moreover, the real rate of service tax may increase to 16% if the government decides to go ahead and levy an additional cess of 2% to fund the Swachh Bharat programme, for which it has created an enabling provision in the Union Budget presented on Saturday.
Travellers booking hotels or flight tickets through travel portals will be worse affected as they would have to pay service tax to the airline company and/or hotel as well as the intermediary through which the reservations are made.
A business class flyer, currently paying a return fare of Rs 2.5 lakh, will now have to shell out Rs 5,000 more, said Sharath Dhall, president of travel portal Yatra.com.
The reasons for business and executive class air travel becoming dearer also include the government’s decision to reduce the abatement on ticket prices from 60% to 40%.
This means that, earlier, service tax was payable on 40% of the airfare, and now it will be applicable on 60% of the same.
A night stay at a five-star hotel is also set to become slightly more expensive. For instance, a room that costs Rs 20,000 per night will be more expensive by Rs 300-400.
“Service tax is an irrational inclusion in the ever increasing tax list and additional burden on the (hospitality) industry. The move only shows that the government is travelling in the wrong direction,” said Bharat Malkani, president, Hotel And Restaurant Association (Western India).“This will directly affect customers.”
India’s hospitality sector is one of the highest taxed among emerging markets. Apart from service tax, guests have to pay value added tax (VAT) and luxury tax of 10-20%, depending on the state.
“Foreign tour operators already complain that hospitality taxes are the highest in India. The increase in service tax will adversely affect the sector,” said Vivek Nair, chairman and managing director, The Leela Group.
Brick-and-mortar travel agents are afraid that if the overall demand for flight and hotel reservations in India falls due to increased taxes, their business, already under pressure from their online counterparts, will suffer further.
“Travel agents are already suffering from lack of business and the incremental service tax will further worsen the situation since people will stop coming to us to book tickets. We have seen in past that people tend not to use services that are expensive,” said Iqbal Mulla, president of Travel Agents Association of India (TAAI).
Operators of amusement parks envisage an over 10% hike in ticket costs and fear that may deter some visitors. Manmohan Shetty, chairman of Adlabs Entertainment, which operates an amusement park on the outskirts of Mumbai called Adlabs Imagica, says average ticket prices at his entertainment park cost Rs 1,500 per person on an average, which may increase to Rs 1,680.
“Both the Centre and state want to improve tourism, but the Budget contradicts that,” Shetty said.
“This came as a huge surprise. It will be difficult for us to offer discounts to customers going forward.”