The Hospitality and Tourism Industry (the Industry) is a broad industry entailing several goods and services which are made available by various goods services. This makes the tourism industry multifaceted and requires multi-variety of goods or services to be assessed individually.
The Industry not only encompasses accommodation and food but also travel, which further includes domestic travel and at times international travel. Besides these core areas, the industry also includes certain subsidiary areas i.e. cost of visa, airport tax, permits for local tourism, commissions, etc.
The economic importance of the Industry cannot be undermined. The total contribution of the Industry to the total economy of India in 2019 was recorded to be 6.8% and has been predicted to reach 9.2% by 2029. It not only brings in foreign exchange but also is responsible for providing employment to a substantial chunk of the population. It also attracts foreign direct investment (FDI).
Further, the Industry is highly competitive with multiple players and is influenced by price changes, which is in turn a result of several factors including tax. It is important that a comprehensive taxation regime governs the Industry which not only benefits the final consumers, suppliers and other stakeholders but also the economy.
Hereinbelow we aim to examine the impact of the imposition of Goods and Services Tax (GST) on the Industry by studying the structure of taxes which was applicable in the pre-GST era and the structure of GST and the pros and cons of the same.
PRE-GST ERA OF TAX ON HOSPITALITY AND TOURISM INDUSTRY
A. Structure of pre-GST tax on the Hospitality and tourism industry
From a pre-GST taxation point of view, the Hospitality and Tourism Industry is a complex industry. The taxation of the Industry was characterised by lack of standardisation as different goods and services were subjected to various taxes imposed by both, the State Government as well as the Centre Government.
Important indirect taxes that were applicable to the Industry are explained in brief below –
- Service Tax
As the name suggests, service tax is a tax on services provided to the consumers. There is a wide range of services that are provided under the Industry.
Inter alia, this not only includes services related to accommodation such as services of hotel accommodation, restaurants, cleaning and laundry, spa, etc. but also includes those related to travel such as flight and train ticket, renting of cab, etc.
- Central Excise duty
Excise Duty is a type of tax imposed on production of certain goods which is payable by the producer of the goods and can be recovered by such producer from the final consumer of the goods by adding it to the selling price.
With respect to the Industry, goods subjected to excise duty would include chocolates, cookies, cakes, etc.
- Value-added Tax
The Value Added Tax (VAT) follows a rather distinct mechanism. VAT is a tax imposed by every state at a different rate on a product in a supply/distribution chain, the value of which increases after every sale.
VAT is levied on every such sale within the supply chain and a person paying VAT recovers the tax from the subsequent buyer in the supply chain. Food, airline turbine fuel, spa and health products are some of the major components of the Industry subject to VAT.
- Taxes on Air Travel
There are certain taxes that are charged on different components of Air Travel. The prominent ones among those include user development fees, fuel surcharge, passenger services fees, etc.
- Taxes on travel by road
Besides toll tax which is imposed on a per kilometre basis on the use of facilities such as national highways or bridges, a tax called the Motor Vehicle tax is imposed on vehicles charged at a quarterly or annual basis by every state primarily for the purpose of road maintenance.
- Luxury Tax
Luxury Tax is a tax imposed by different states at different rates on goods or services which fit the definition of ‘Luxury’ under the Luxury Tax Act for the respective State. This may include services offered at Spas and at 5/7 star hotels, etc.
- Entertainment/Amusement Tax
Entertainment tax is required to be paid by the entertainment industry on forms of commercial entertainment such as movie tickets, private festivals, exhibitions, etc.
B. The Shortcomings of the structure
The most obvious limitation of the pre-GST era was a multiplicity of taxes. In addition, taxes imposed by States lacked uniformity because of varied rates applied across different states. These factors made the structure complex.
A person paying for a hotel room would have to incur, besides the cost of the room itself, service tax, VAT, and at some times Luxury Tax. A similar arrangement was followed in the case of food and beverages.
Moreover, under this structure, taxes were made to pay on an amount inclusive of other taxes which led to a cascading effect detriment to taxpayers. Though a certain amount of abatement (relaxation of a proportion of tax) was allowed, it did not help the situation completely.
In a nutshell, the pre-GST structure of taxation applicable to the Industry was not only confusing but also costly for the consumers.
GST ON THE HOSPITALITY AND TOURISM INDUSTRY
A. Current structure of GST on the Industry
The introduction of GST transformed the structure into a uniform and simpler one. The GST regime introduced 5 tax slabs – 0%, 5%, 12%, 18% and 28%. Thus, every good or service is taxed under one of these tax slabs.
With the introduction of GST, the option of Input Tax Credit (ITC) is also made available for certain components. ITC essentially is a reduction of the tax paid on the inputs from the tax paid on output.
The below discussed are some of the major categories of the Industry and the respective GST rates applicable to their components.
- GST on Hotel Accommodation
The three GST slabs that apply to hotel rooms are 0%, 12%, and 18% which correspond to the amount of tariff charged per night. For hotel rooms having tariff per night less than Rs. 1000, no GST is applicable.
For those having tariff in the range of Rs 1,001 to 7,500, GST of 12% is applicable, and for those exceeding Rs. 7,500, 18% GST is applicable.
Formerly, the 28% slab rate was also a part of this structure but it was done away with subsequently.
- GST on Food and Beverages Services.
Most services related to food and beverages are covered under the 5% and the 18% slab. The 5% tax slab rate is applicable essentially to meals provided by the Indian Railways (including their licensees), restaurants (including ones within hotels with tariffs below Rs. 7,500), canteen/mess in a school, office, college, etc. operating based on a contract.
On the other hand, the 18% slab rate includes food services provided by restaurants within hotels with tariffs above Rs. 7,500. It also includes food services provided at an occasional or event-based conference, functions, etc.
- GST on Travel
When it comes to travel, the GST usually varies depending on the category of the ticket. A GST of 5% is applicable on Flight tickets of economy class whereas a GST of 12% is applicable on that of business class.
Similarly, a 5% GST is applicable on the passenger fare of railways for AC and 1st class tickets. For renting taxi services, a GST of 18% is imposed and for buses, a GST of 5% is imposed.
B. Benefits of GST
The current structure of taxation under the GST regime applicable to the Industry has been beneficial to the stakeholders of the system. The benefits of GST to the hospitality sector have been discussed below:
- Since, multiple layers of taxation have been replaced by one single tax; it has streamlined the process and resulted into easier compliance.
- For a layman it is difficult to have an understanding of the operation of different taxes and the simultaneous application of them on a commodity or service. However, with the introduction of GST, customers have clarity with respect to the tax applicable to them.
- With the availability of ITC and the simpler process for availing it, costs have been reduced for people spending on inputs.
- Introduction of GST has also resulted into reduced costs. This is major because of the elimination of cascading effects that took place in the pre-GST regime. Additionally, tax rates imposed under GST is lesser than that imposed before GST with respect to certain services and commodities. This reduction in cost will attract more tourists and will ultimately boost the Industry.
- Because of State and Central GST, both the Centre and the State Governments would have the opportunity to collect tax out of this Industry.
The Court as well as the Authority for Advance Ruling (AAR) and the Appellate Authority for Advance Ruling (AAAR) has time and again ruled to bring clarity to the matters relating to GST. This includes matters related to uncertainties related to the classification of certain goods or services, availability of ITC, etc. Some of the rulings pertaining to the Industry have been discussed below.
The AAR, Haryana in the case of In re Jewel Classic Hotels Pvt. Ltd. (HAR/HAAR/2019-20/23 dated 25.06.2020) discussed the issue of Whether the extra bed forms part of the room tariff and liable to be charged as per various rates prescribed as per slabs given under certain notifications?
The AAR, Haryana observed that the rate of tax would be paid depending upon the value of supply (which is determined based on the total charges including the cost of accommodation and extra bedding). Hence, the amount that is subjected to tax should contain the cost of extra bedding added to the room tariff.
Another important issue was, whether tax is to be imposed on additional arrangements, besides renting of premises, foods, and beverages, including things such as flower decoration, DJ, Dance Floor, etc.?
The said issue was decided in respect of the concept of ‘pure agent’ which was explained to be a term used to refer to a party that engages in the facilitation of services from a third party to its customer recovering from the customer only that amount which has been paid to the third party.
Since, in the present facts, the Applicant had charged a facilitation charge from its customer, it was held to be liable to pay GST on such additional arrangements as well.
Further, in the case of In re M/s Gogte Infrastructure Development Corporation Limited (KAR ADRG 02/2018 dated: 21.03.2018), AAR, Karnataka deliberated on the issue that whether restaurant and hotel accommodation services provided to SEZ units’ employees and guests constitute a supply of goods and services to SEZ units.
The AAR observed this in the negative stating that, “Since the place of provision of services in case of Hotel has been prescribed under the Act ‘location of the Hotel’ the rendition of services of restaurant, short term accommodation and Banqueting/conferencing cannot be said to have been ‘imported or procured’ into SEZ Unit/Developer.”
Furthermore, in the case of In re Golden Vacations Tours and Travels (26/WBAAR/2019-20 dated 23.09.2019), the AAR, West Bengal essentially gave clarity on the question, “Whether a standalone business which arranges the client’s accommodation in hotels can be termed as ‘tour operator’?”
The AAR held that, “tour operator means any person engaged in the planning, scheduling, organising, and arranging tours by any mode of transport. Arranging accommodation might be provided as add-ons, but that is not the essence of the tour operating service.”
THE SHORTCOMINGS OF THE CURRENT STRUCTURE AND SUGGESTIONS FOR IMPROVEMENT
Though the current structure of taxation under the GST regime has been better in many respects as compared to the previous system for the Industry, there are certain shortcomings in the structure which might not be favourable to the objectives of the system.
Hence, to make it easier for such entities, an alternative to the current system of online filing of GST should be drawn to make compliance easier and smooth.
It has been put forth that although the introduction of GST has brought down the total cost of many commodities and services as compared to the previous taxation system, a lower rate of tax should be imposed on the hospitality sector to attract more tourism.
Though the aforesaid has been a debated issue, it is believed by certain experts that even though the reduction in tax rates will hamper tax revenue for the Government, it will boost the revenue generated by the Industry which will eventually compensate for the reduced tax revenue.
There still remain several gaps in the structure of GST related to minor but important issues. Most of these would be fixed as they are tested with time and sometimes when these are brought before the Courts of law.
However, there are certain issues which are evidently visible e.g. exclusion of taxes on the works contract services when supplied for construction of an immovable property from ITC merely because it does not contribute to the further supply. These issues should be cured by the legislature as soon as possible to make the structure of GST comprehensive.
The introduction of GST has certainly made the Industry better but there always remains scope for improvement. The contribution of the Industry to the economy of the country cannot be undermined. The COVID-19 pandemic has badly hampered the Industry and resultantly, its contribution to the GDP.
Hence, the focus of the Government should be to make the structure of GST as comprehensive as possible, taking care of all the stakeholders and at the same time, focusing on attracting more tourism with the view of compensating for the loss done by the pandemic.
– Team AMLEGALS assisted by Mr. Atharva Khubalkar (Intern)
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