GST in travel and tourism

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CA. H.M. Talha Rahman, Partner, Selvarajan & Co., Chartered Accountants, Chennai, speaks at length about what GST would mean for the country’s economy while giving a very accurate and deep understanding about the computation involved for the travel industry.

“There is a big hue and cry about GST and people are speculating a lot about this. What we fail to understand is that it is a combination of most of the indirect taxes in a new form, which brings the concept ONE NATION ONE TAX.”

The GST was implemented successfully by few countries many years ago. I remember having waited in a queue in Singapore Airport for a refund of GST 15 years ago. At that time, Indians used to shop a lot in Singapore which was popular for tape recorders, VCRs, perfumes and other fancy stuff. When we buy them in Singapore, the cost of the item comes with a component called the GST which had to be paid by the local residents as final consumer. But a foreign national could claim the refund of GST paid, by showing the bill and goods at the time of departure from the country. Hence It is called a consumption tax

To put it simply, “Cascading Tax Effect” means tax on tax. Previously when a manufacturer sells his product, he adds Excise Duty with his selling price and send the goods to the distributor. In turn when the distributor sells the same goods to the end user, he adds his profit margin and also charges VAT on the added prices which includes Excise Duty. In other words, a tax (VAT) is paid on another tax (Excise Duty), which has cascading tax effect. Now in the GST era, in this example, both Excise Duty and VAT is clubbed as GST and the GST charged by the manufacturer to the distributor can be adjusted as ITC (Input Tax Credit) thus avoiding the tax on tax.

To explain the concept in simple terms, let us assume that a distributor called “B” buys 1000 units of a product from a manufacturer called “A” at a price of Rs. 100 per unit. The Invoice by A will look like this:

SlNo Description No of Units Unit Price Total Amount
1 Sale of Product 1000 100 1,00,000.00
2 GST @ 12% 12,000.00
3 Total Invoice Amount 1,12,000.00
(In this example, A collects Rs. 12000 from B as GST and pay the entire amount to the Government)

Now let us again assume that B sell all these products to a retailer called “C” keeping 5% as his profit margin and his selling price will be Rs. 105 per unit. The Invoice of B will look like this:
Sl.No. Description No of Units Unit Price Total Amount
1 Sale of Product 1000 105 1,05,000.00
2 GST @ 12% 12,600.00
3 Total Invoice Amount 1,17,600.00
(Now B Collects Rs. 12600 from C as GST, but he will not pay the entire amount to the Government, instead he is allowed to deduct Rs. 12000/- which he has already paid to A as GST and pay only the balance amount of Rs. 600 to the Government. This credit of Rs. 12000 is called ITC, Inward Tax Credit). If you notice in the above example, tax is not levied on tax and hence GST will not have any cascading tax effect.

One of the greatest advantages of GST is the seamless flow of “input credit” (please refer the example above: Rs. 12000 paid by B towards GST to A is ITC of B) across the chain and across the country. All taxes (GST) paid to a registered dealer for the purchase of goods (including capital goods) and supply of services can be deducted as ITC from the GST collected from your bills and the balance tax only need to be paid as tax.

There are few exceptions, for example, the GST paid on Motor Car or Motor Cycles etc by the non-transport businesses cannot be used as ITC.

Compliances mechanism of GST is going to be a major roadblock for small traders and service providers. Every registered dealer has to file three returns in a month and one annual return making the total number of returns to be filed as 37 per annum. These returns are to be filed electronically in a platform called GSTN (GST Network) and requires tremendous knowledge, accuracy and skill. It is absolutely difficult, if not possible for small timers to comply with these requirements on a monthly basis. It is strongly advised to use the services of Chartered Accountants or Tax Return Preparers appointed by the department

1. Small Manufacturers, traders, dealers and service providers whose turnover does not exceed Rs. 20 lakhs in a financial year are exempt from the registration and payment of GST.
2. Composition Scheme: Those small traders whose turnover exceeds Rs. 20 lakhs but below Rs. 75 lakhs can opt for the Composition Scheme which allows them to pay GST at a lower rate to be fixed by GST Council, which will not be less than 1%. But they cannot avail ITC and they cannot undertake any inter state transactions.
3. Unfortunately, the small service providers cannot opt for the composition scheme.

Tourism Industry and travel and tour agents in particular are facing a tough time due to various factors like no commission by the airlines, direct marketing of airlines, higher taxation, poor tourist infrastructure etc. Their major sources of income are listed below:
1. Commission from Airlines, Cruise Companies, Travel Insurance Companies etc
2. Sale Tour Packages, both inbound and outbound
3. Travel Related Services like Visa, Passport etc.
4. Incentives Received from CRS Companies

Now we shall deal how GST is calculated on these items.
Commission from Airlines, Cruise Companies, Travel Insurance Companies etc:
1. One has to understand that an airline or a cruise ticket or the travel insurance policy issued by insurance companies is a contract between the airline/cruise/insurance company and the passenger. The travel agent is only a facilitator who receives commission from the companies. Hence GST on these ticket/policy will only be consumed by the passenger and the agent cannot use them as their input credit.
2. However the agent has to pay GST on the commission received from the airline/cruise/insurance companies on the reverse basis. (For Example, if the GST is 18% and the agent receives Rs. 100 as commission, he has to pay only Rs.15.25 (100-100/118%) as GST). This amount of Rs. 15.25 should not be collected from the passenger.
3. If the agent collects Service Fee as an additional charge from the passenger and show it in the invoice separately, he can add GST on the service fee in the invoice and collect the same from the passenger.

Sale of Tour Packages, both Inbound and Outbound:
1. Only outbound tour sold to a foreigner for visiting another foreign country and the payment is received by convertible foreign exchange is exempt from GST. All other tours (including inbound tours for foreigners) are taxable.
2. GST paid on the purchase of tour packages from another tour operator can be claimed as ITC and only the difference tax can be paid to the Government.

Travel Related Services like Visa, Passport etc.
1. All government fees and consular charges paid on behalf of the consumer/client is outside the purview of GST
2. Service Charges on the above services should be subject to GST which can be collected from the end consumer.
3. If the services are outsourced from another service provider (For example a travel agent from Chennai has to outsource a Delhi Agent to get the Visa for Uzbekistan), GST paid on the Delhi Agents Invoice can be claimed as ITC and only the difference can be paid to the Government.

Incentives Received from the CRS Companies:
1. Incentives received from CRS companies attracts GST, which has to be borne by the travel agent.
2.Like the commission receive from the airlines, GST on this also can be paid on the Previously we did not know the exact percentage of the excise duty that we would pay. Now it is not like that. GST is an excellent thing. GST has got both Goods and Services.
– one nation one tax. All excise and other taxes have been absorbed. Certain services, at the outset, may not look like service but have been asked to consider as services.

Even the tax consultants and CAs are taking time to understand the GST. Tax consultants who are usually retired persons from the VAT dept will take longer time to understand and will rely on their practical exposure on trial and error basis. It is better initially to engage the Chartered Accountants than tax consultants. They can go through CAs or Tax Return preparers recognised by the department.