Tax roadblock to tourism drive: India isn't 1st choice for foreign tourists

India is still not the first choice for foreign tourists and operators because it levies higher taxes and Southeast Asian countries promote themselves more

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

India offers attractive places for tourism, ran­g­ing from one of the wonders of the world, Taj Mah­al, to heritage sites such as Khajuraho, Red Fort, Agra Fort, Qutub Minar, Ajanta Caves, Ellora Cav­es, and from pilgrimage areas like Puri, Ram­es­wa­ram, Tirupati, Amritsar, Ujjain, Ayodhya, and Ke­d­arnath, to wildlife sanctuaries and parks at Kazir­anga, Ranthambore, Kanha, Sariska, and Corbett.
 

Travel and tourism (T&T) was projected to contribute $209.7 billion to the Indian economy in 2023, a little less than the $212.8 billion in 2019, according to the 2023 Economic Impact Research report by the World Travel & Tourism Council. The sector was projected to contribute 6 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 the study, “India and the Coronavirus Pandemic: Economic Losses for Households Engaged in Tourism and Policies for Recovery”, conducted by the Ministry of Tourism.

Taxing problem
 

But it is not that simple.
 

The GST Council had earlier 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 in competing economies. It is 9 per cent in Singapore and averages around 7 per cent in other Southeast Asian countries.
 

Food services provided by restaurants draw a rate of 5 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, it attracts 18 per cent GST with ITC.
 

There is also 5 per cent GST without ITC on cab fares and tour operators. Alternatively, there is 12 per cent GST with ITC on cab fares.
 

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 5 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 5 per cent GST without ITC comes to around 12 per cent, which is higher than the tax rates in Malaysia, Singapore, and Thailand.
 

Pronab Sarkar, former presi­dent of Indian Association of Tour Operators and owner of Swagatam Tours Pvt Ltd, points out that the GST on tourism services stands at 18-23 per cent in India, compared to 6-8 per cent in neighbouring countries.

“Therefore, Indian packages are more expensive,” he says.

 

Domestic drive
 

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 the actual data is awaited.
 

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 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 Southeast Asian countries due to the cost-price disadvantage caused by PoS rules, says the report, “'Tourism: An engine for economic growth and employment generation”, by EY and the 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, points out the report.
 

“To position India as a premier tourist destination, we need to boost the global competitiveness of its tourism,” says  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 says, adding China is adjust­ing its visa rules for European visi­tors to enhance numbers. VAT ref­u­n­ds for tourists are a common practice among India’s competitors. Kar suggests that 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,” says Kar.
 

Sarkar of Swagatam Tours says the govern­m­ent is promoting domestic tourism and not in­bound one. “The tourism ministry is not promo­ting international tourism to India and no more foreign marketing and road shows are happening to bring foreign tourists to India,” he says.
 

However, it is a new subject for the embassies to handle so there is a big drop in tourist arrival, Sarkar says, adding the neighbouring countries are doing aggressive marketing and offering free visa upon arrival. “We are at multiple disadvantages and the recovery may take another three years to arrive at figures of 2019-20,” he says.
 

When tourists flow increases, investors follow. So, infra­stru­c­ture development is also very much connected with the growing numbers, says Sarkar.
 

Kar suggests that 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 benefits of India’s G20 presidency.
 

“Tailoring incentives for both national and glo­bal travellers is the 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 says.