GST and direct tax laws, in their current form, create several unnecessary hurdles for online travel agents as well as other sub-sections of the travel industry, robbing it of revenue
The sector provided employment to around 31.8 million, with a potential now to create 26 million new jobs and a contribution to GDP by 10%.
By Rameesh Kailasam & Madhabi Sarkar
As India continues its aspirational journey to become a $5 trillion economy by 2026, travel & tourism remains to be a potential growth sector, ably supported by the government’s determination to connect different parts of the country through new airports, railways, and roads. In 2021, the travel and tourism sector in India contributed around 5.8% to the total GDP, amounting to over Rs 13 billion, an increase of nearly 44% compared to the previous year. The sector provided employment to around 31.8 million, with a potential now to create 26 million new jobs and a contribution to GDP by 10%. The government seems to understand this immense potential of the sector. It is focusing on creating and fostering tourism in different areas, such as medical, rural, eco, beach, cultural and spiritual tourism. However, while such visionary steps are underway, the sector continues to suffer working capital and investment issues as certain taxes and compliances take a heavy toll on those who are sincerely located and operate a ‘permanent establishment’ in India. These, however, do not apply to those who operate outside the Indian territory. This is leading to a gradual shifting of Indian customers to overseas entities as they thoroughly enjoy lower costs due to the non-applicability of GST or direct taxes. Besides, customers feel that since there are no KYC requirements for foreign travel, it is safer to book via overseas travel agents. Such differential regulations are beginning to deliver a long-term blow to India-domiciled companies and startups in this space, besides huge revenue losses for the government.
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Various provisions of the direct taxes, as well as the GST Act, require the online travel agent (an e-commerce operator, OTA) to collect taxes from airlines. The intention of these provisions was to prevent tax avoidance. However, since the airline industry is fairly governed and follows International Air Transport Association (IATA) rules, such agents have to initially pay out of pocket, causing undue working capital and economic hardship. Ideally, the provisions should be immediately amended to ensure that such a tax deduction rule in both direct tax and GST should not apply in case of ticketing by an airline for an OTA.
Another provision of the GST law requires an OTA to obtain registration and have a physical office in every state by appointing a compliance officer, creating an unnecessary additional administrative cost. This never existed during the service tax regime. Imagine running an online travel services business that has no reason to have physical offices but is forced to open 36 offices, have GST registrations, and tax-collection-at-source (TCS) to offer services across India, filing over 100-plus returns a month. Added to this are the multiple investigations on the same transaction by different states and the Centre, making it a perennial exercise. Ideally, the government should do away with all these provisions in the GST law. This goes against the concept of Digital India and leads to an infructuous additional cost. The simplest solution for all such provisions is a centralised mechanism where there would be no loss to state governments as operators would be charged integrated GST (IGST) from their centralised location, and revenue would accrue to the state where the place of supply would be.
Another notification applies GST on any online application that facilitates ticket sales for non-AC buses, which were earlier exempt from GST. This provision imposes GST on non-AC bus tickets if bought online but is exempt if bought offline, defeating the fundamental purpose of encouraging people to go digital.
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A direct tax provision mandates the collection of 5% TCS with PAN and 10% TCS without PAN from the customer of an overseas travel package from any online e-commerce entity, thereby causing inconvenience to all tax filers and salaried taxpayers whose savings are now subjected to further tax deduction if they book any overseas package online. This, in fact, encourages Indian customers to completely shift from India-based operators. It is pertinent to note here that overseas travel agents, especially foreign direct suppliers, usually provide standalone component bookings in direct competition with domestic travel agents. This gives an unfair advantage to the former. The said provision should be repealed as it creates an unfair playing field.
To widen and deepen the tax net by bringing e-commerce participants within the ambit of TDS, Section 194-O was introduced with a deduction of tax at 1% on the gross amount of such services. Before this, similar provisions already existed under section 52 of GST law since 2018, wherein e-commerce operators are required to collect 1% of the net value of taxable supplies made through it by other suppliers. Therefore, the GSTIN is already available, which can be leveraged, and the compliances can be streamlined easily and made applicable only in cases of GST-unregistered e-commerce participants instead of applying to everyone.
The travel and tourism sector is in dire need of regulations to help its ease of doing business that will help its working capital and retain its customers.
The author is Respectively, CEO, and senior manager (policy), Indiatech.org