Manoj Khanna began his travel company, Khanna Travels and Holidays, over a decade ago in Navi Mumbai. From a single-man operation, it has grown to 25 employees. But now the future looks bleak to Khanna. “Tourism and travel was the first sector to shut down and it will be the last to open,” he says. “It’ll be tough to survive till then.”
It’s a similar refrain across the travel industry. Indeed, with no revenues and fast depleting working capital, small tour operators are staring at mass layoffs and bankruptcies. They need a lifeline. The stakes couldn’t be any higher for India.
The travel and tourism industry contributed about 10% to India’s GDP in 2018, adding up to a massive 42 million jobs – about 38 million of these are likely to be lost in the Covid-19 outbreak. The bulwark of the Indian economy in the past, the sector is facing an imminent collapse.
Indian tour operators are demanding the removal of several roadblocks by the government to help them survive. They are seeking tax breaks and incentives – in particular, they are demanding a scrutiny and an overhaul of the 5% tax on overseas tour packages by Indian travel agencies. It was intended to track and penalise tax evaders in India, but the travel tax may have made domestic tour operators uncompetitive against foreign players.
The travel industry is also demanding a full refund of the air tickets cancelled by airlines in recent months. And that’s not all – they are seeking a tweak in the GST framework as well.
All these measures may not lift the travel industry from the doldrums, but can make some difference, say industry insiders. These are desperate times after all.
Here’s a reality check.Thomas Cook India – a company with INR1,724 crore in cash and cash equivalents, no long-term debt and working capital limit sparsely utilised –- got its rating revised to “negative” from “stable” by Crisil. This was primarily because the agency believes that the company’s profitability and cash-flow metrics could be materially impacted by the travel restrictions. Now, compare this to smaller players like VMV Holidays and Crown Tour, which make annual revenues in the range of INR1 crore-INR2 crore – both of them had cash and cash equivalents of only about INR1.4 crore as of March 2019. There isn’t any breathing space for such smaller players to survive this lockdown.
With the collapse of Jet Airways and Cox & Kings, and social unrest with protests across the country, the Indian travel industry had taken a massive blow because of events beyond its control last year. During the economic slowdown, it did seem that tourism was holding out better than other sectors, but the global crackdown on travel due to the pandemic proved to be the last straw.
“In India, most of the summer-holiday bookings have been cancelled (about 40%-50%, most of which were to states of Kerala, Rajasthan, and Goa), impacting domestic tourism. The impact on the inbound and outbound passengers is expected to be most severe in the next couple of quarters,” a report by Care Ratings says. The report adds that for the year 2020, the industry is expected to book a revenue loss of INR125,550 crore, a slide of over 40% year-on-year (y-o-y).
To make things worse, tour operators tells ET Prime that banks have started to impose even more stringent conditions while giving out loans.
The tax on overseas travel
The Finance Bill for this year proposed the addition of two provisions with regards to tax collected at source (TCS).
- TCS on remittance under the Liberalised Remittance Scheme (LRS) of the RBI for amounts exceeding INR7 lakh in a financial year.
- TCS on sale of an overseas tour package through a tour operator.
For both these additions, a 5% tax collection from the customer at the time of purchase was proposed (10% in case the buyer doesn’t furnish PAN). There has been some relief in the case of remittances – the finance ministry has lowered the tax for education-related remittances to 0.5%, from the earlier proposed 5%. But an extension has been announced for the one on foreign tour packages.
The government’s rationale behind this is to clamp down on tax evaders. It believes that if people are remitting big amounts or have the money to go on foreign trips, they should be in the income tax bracket and pay taxes – but data suggested otherwise. “We have data that shows many persons who transferred funds abroad under this scheme did not file income-tax returns,” revenue secretary Ajay Bhushan Pandey explained. Of the 5,026 selected cases of foreign remittance, data showed that 1,807 did not file returns.
Speaking at the Times Now Summit earlier this year, Prime Minister Narendra Modi pointed out that out of the 30 million Indians who went abroad last year, only 15 million paid income tax.
The 5% tax that’s collected can be claimed by buyers as credit at the time of filling their income-tax return. It, therefore, doesn’t add to the government’s revenue, but does allow for better tracking of tax evaders and also lets the department mop up tax revenues from persons who don’t file returns.
How the travel tax hurts the Indian tour operator
This tax is only applicable on overseas tour packages by Indian travel agencies, both offline and online, and not on entities registered abroad. This makes the domestic players uncompetitive against their foreign counterparts, as we said earlier.
Second, there is no lower limit on this – so, even for a small tour package worth a few thousand bucks, a 5% tax will have to be paid. Thus, for a traveller it would make more sense to book directly with a foreign operator, and a sizeable chunk of the Indian outbound industry will be lost to foreign entities that pay no taxes in India.
“This hurts our relationship with the customer because for them, there is already a 5% GST and on top there will be another 5% tax now. This additional cost will scare him, and he will take a package online from the one of the venture capital-funded companies, which anyway give deep discounts,” Khanna says.
Most of the tourist destinations for Indians, such as Germany, the US, the UK, Spain, and France, are very badly affected and their economy is in a shambles, points out EM Najeeb, vice-president of the Indian Association of Tour Operators (IATO). “So, even if India deals with this in a far better way than the rest, our international business is not going to come back in the next 12 months, but once restrictions are lifted, our domestic tour operators should not be at a competitive disadvantage. The government should consider cancelling this tax, which at present it has deferred till October 1,” he says.
There should be a GST holiday for one year for tourism, and visa fees should also be completely exempted, adds Najeeb.
Even on purchase of gold, the TCS wasn’t this harsh, according to Khanna. “It was just 1% on purchase of above INR5 lakh. Why isn’t there even a threshold when it comes to foreign travel and why is the rate so high at 5%?” he says. “The customer doesn’t understand the idea of the 5% TCS — that they’ll get it back. The government can put this tax just on people paying cash and remove it for those who pay by card or cheque.”
Other roadblocks
To help them get back on their feet when things normalise, tour operators demand the removal of a few similar hurdles.
GST is another bone of contention. There is no input tax credit available if a hotel and an operator are located in different states, which then becomes a cost for the latter.
“If there is a hotel in Kerala and if someone books it from Maharashtra, they don’t get the input. For hotels, they have made the point of service as the point of location of the hotel. Hence, a company from Maharashtra won’t get the 18% input credit if it arranges a conference in another state. That is why corporates are not doing inter-state conferences much these days,” Khanna says. “Rich states, where the corporates exist, benefit from this but tourism-dependent states like Himachal Pradesh and Kerala are losing out on such corporate-conference tours.”
Tour operators tells ET Prime that there is another issue, if resolved, would help the industry in a big way immediately.
With the shutdown of air travel, bookings done by tour operators were cancelled but the refund hasn’t been made to them – it was instead put in a credit shell created by airlines. In essence, this money is parked with the airlines and hasn’t come into the hands of the tour operators, but the customers are demanding refunds, which the tour operators are paying out of their own pocket.
A petition has already been filed before the Supreme Court against the credit shells formed by airlines. The apex court has already issued notice seeking appropriate directions to airlines for a full refund of the ticket amount.
Khanna tells us that he has around INR35 lakh stuck with the airlines. “I have to take care of these liabilities first. Only after that can I take care of my staff.”
The bottom line
While the government contemplates and finalises a relief package, it should immediately identify and start removing the pain points for the travel and tourism industry, like those mentioned here. It’s imperative, as the sector is a huge job creator.
“Let’s be real, the government can’t hand out money to everyone. That begs the question: How can we be helped?” says a tour operator who requested not to be named. “Help comes later. First, we shouldn’t be harmed any further when operations resume. There should at least be a level playing field.”
In a video address after the lockdown, Prime Minister Narendra Modi asked people to “answer corona with karuna (compassion)” towards the poor and needy. A compassionate package, clearly, can be a lifeline for millions of small tour operators and travel agencies, and help keep the economy on its feet.
The government should realise that many a time even well-intended policy measures can lead to unintended consequences. The 5% tax on overseas tour packages is one such retrograde step.
via Travel industry seeks tax breaks, incentives to survive. Can India save 40 million jobs? – ET Prime
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