On Wednesday, the Lok Sabha passed the four GST bills after a long discussion, paving the way for the realization of the biggest tax reform independent India has seen. The Indian hospitality and tourism industry, which was pegged at US$ 136.2 billion at the end of last year, is one of the sectors which will see major changes after July 1st. Experts observe that the implementation of GST will provide an edge to the sector by reducing costs for customers, harmonizing taxes, and reducing business transaction costs.
The current situation:
The hospitality industry, like every other sector in the Indian economy, pays multiple taxes (VAT, luxury tax, and service tax) in the existing indirect tax regime. A hotel where the room tariff exceeds Rs 1,000 is liable for service tax at 15 percent. An abatement of 40% is allowed on the tariff value bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12 percent to 14.5 percent) and luxury tax will still apply. However, for restaurants there is 60% abatement which means that the service tax is charged at an effective rate of 6% on the F&B bills, apart from VAT (12 percent to 14.5%). Bills for bundled services like social functions (seminars, marriage etc.), are taxed with an abatement of 30%. The cascading effect of the existing indirect tax regime where the end consumer pays a tax on tax, increases the end cost. Hoteliers and hospitality businesses do not get any input tax credit on the taxes they pay currently, as central taxes cannot be set off against state taxes (VAT) and vice-versa.
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Under the GST regime:
Under the Goods and Service Tax, the hospitality sector stands to reap the benefits of standardized and uniform tax rates, and easy and better utilization of input tax credit. As the final cost to end user decreases, we can expect the industry to attract more overseas tourists as compared to our neighbors. This would ideally result in improved revenues for the government. Although, the Goods and Service Tax paid at 18% is higher than the prevalent rates, there are many pros to this new tax regime which could help the industry’s growth in the long run. Let’s have a look at these in detail:
The Pros of GST
1. Administrative Ease
GST will abolish several other taxes, leading to a reduction in procedural steps and more chances to streamline the taxation process.
2. Clarity for Consumers
It is still very difficult to differentiate between a Value Added Tax and an entertainment tax for the common man. However, under the GST regime customers will see only a single charge on their bill and it would give them a clear picture of the tax they are paying.
3. Improved Quality of Service
How many times have you stood waiting in the hotel lobby wondering if you would miss your flight back home, because your bill was still not prepared? With just one tax to compute, the checking out process at hotels and restaurants will now become easier – another perk that the hospitality industry can brag about.
The Cons of GST
1. Increased Technological Burden
When the service tax was first introduced, there were a lot of mix ups. GST, thankfully, has very clear guidelines on how each industry needs to manage their accounts and file returns but it will require businesses to become technologically adept, increasing the technological burden and cost for compliance.
In Maharashtra, for instance, hotel rooms are taxed at 19% and food and beverage at 18.5%. Even with GST charged at 18%, there is minimal cost reduction in both cases. Businesses will also look to recover the additional cost of technology and new systems from their customers, which might – in some instances – lead to higher tariffs.
3. Lack of Parity with Asian Counterparts
As India becomes an even bigger player in the global hospitality and tourism industry, we need services to be at par with global rates. Our Asian neighbors such as Japan and Singapore have very low tax rates for their hospitality sector (8% and 7% respectively) which is an important reason for them ranking high on tourist wishlists.
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GST is a mixed bag of better and easier rules and regulations, and increased costs and compliances. The Hotel and Restaurant Association of Western India has been lobbying for a GST rate of 5% as it believes that a lower rate will bring in more tourists and allow Indian businesses to compete with global chains. The Tourism and Hospitality industry in India is expected to grow to US$ 280.5 billion by 2026, and the initial hiccups after GST implementation are highly unlikely to impede this growth. However, it remains to be seen whether the cons outweigh the pros for this sector. In the meantime, if you have travel plans post July, our bet is you will not have to backpack to save money – the three star hotel you had your heart set on might just become affordable!
(The author is Founder & CEO, ClearTax.com)