In India's drive to boost tourism, tax becomes roadblock for industry

Sector struggling to recover from effects of pandemic created 1.6 mn jobs in 2023

Prime Minister Narendra Modi's visit to Lakshadweep and the consecration ceremony at the Ram temple in Ayodhya have reinforced focus on the tourism sector, which is struggling to recover from the effects of Covid-19 amid a stressed geopolitical situation.

Travel and tourism (T&T) was projected to contribute $209.7 billion to the Indian economy last year, little less than $212.8 in 2019, according to the World Travel & Tourism Council's (WTTC) 2023 'Economic Impact Research' report. The sector was projected to contribute six per cent to the gross domestic product (GDP) in 2023, one percentage point less than in 2019. It shows that the sector did not recover fully from the Covid-19 period even in 2023.

And yet it was forecast to create more than 1.6 million jobs in 2023 to reach almost 39 million in employment and recover almost all the jobs lost due to the pandemic, said the report. Around one in 13 workers in India are in T&T.

India's tourism economy will regain its pre-pandemic expenditure by 2024-25 with domestic demand driving growth. It is likely to grow by four times the pre-pandemic level by 2028-29, according to a study called 'India and the Coronavirus Pandemic: Economic Losses for Households Engaged in Tourism and Policies for Recovery' and conducted by the Ministry of Tourism.

Taxing problem

However, there are issues hurting tourism's growth: the foremost is taxation policies.

The GST Council agreed to the sector's demand and lowered the tax rate on hotels from 28 per cent to 18 per cent for those where room rent is at least Rs 7,500 per day. The rate is 12 per cent on other hotels. Even then, the tax rates are higher than competing economies. It is nine per cent in Singapore and averages around seven per cent in other southeast economies.

Food services provided by restaurants draw a rate of five per cent GST without input tax credit (ITC). However, if the restaurant is in a hotel where room rent is at least Rs 7,500 a day, the restaurant attracts 18 per cent GST with ITC.

There is also five per cent GST without ITC on rent, cab services and tour operators. Alternatively, there is also 12 per cent with ITC on rent and cab services.

Tour operator service is primarily a combination of arranging air or rail travel, providing hotel accommodation, meals, surface transportation, arranging guide, local sightseeing etc. Therefore, the five per cent tax on the entire package value results in taxing all the input service procurements made by the tour operator once again. This has resulted in cascading of taxes in the entire supply chain, defeating the primary objective of taxation.

Experts say five per cent GST without ITC comes to around 12 per cent which is higher than tax rates in Malaysia, Singapore and Thailand.

Most T&T consumers are in India. International tourists incurred 11.5 per cent of the T&T spending in 2022 and domestic 88.5 per cent. The share of international visitors was less than 12.8 per cent in 2019. Such visitors' T&T spending was forecast to rise to 13.69 per cent in 2023 but actual data is yet to be awaited.

Foreign tourism

Encouraging foreigners to visit India is hampered by place of supply (PoS) rules. According to a provision of Integrated GST (IGST), PoS of an Indian tour operator giving services to foreign tourists happens to be in India, where the tourist is physically present or comes in contact with the Indian tour operator for the purpose of availing services. Since the PoS is India, IGST is levied on tour operators. POS along with the cascading effect of GST has resulted in the loss of business for tour operators.

Indian tour operators are not able to compete with the other Asia Pacific countries due to the cost-price disadvantage caused by PoS rules, says the report on 'Tourism: An engine for economic growth and employment generation' by EY and Indian Association of Tour Operators.

India is not the first choice of foreign tourism operators as southeast Asian countries like Malaysia, Thailand and Indonesia are heavily promoted, said the report.

To position India as a premier tourist destination, we need to boost the global competitiveness of its tourism," said Sumitro Kar, executive director of WTTC, India Initiative.

India can take cues from Thailand, Vietnam and Malaysia, which offer 30-day free visas to boost footfall, he said, adding China is adjusting its visa rules for European visitors to enhance numbers.

Similarly, VAT refunds for tourists are a common practice among India's competitors. Kar suggested India consider GST refunds for tourists who make digital payments.

"Post-pandemic, competing destinations are executing compelling immersive marketing campaigns, rekindling tourist interest. The need of the hour is to implement the intricately crafted Incredible India campaign, with a precise focus on key international source markets, aiming for consumer conversions with tangible results," said Kar.

The opportunity to boost international MICE (meetings, incentives, conferences, and exhibitions) business must be seized by leveraging ongoing government projects in connectivity, infrastructure, and the advantages of India's G20 presidency.

"Tailoring incentives for both national and global travellers is key to encouraging them to stay and explore India. This, in turn, will contribute significantly to increased investment, employment, and the sector's contribution to the economy," he said.