Goods and Services Tax – India

June 20, 2017

The Government of India has undertaken a major tax reform to replace various state and federal taxes with a common Goods and Services Tax (GST) across the country. The parliament has adopted this new bill after various deliberations and the same will be applicable from the 01st July 2017.

The GST council has announced the applicable rates for various industries. While we are still awaiting a series of clarifications from the tax authorities and our tax consultants, as per our current understanding and interpretation, the tourism and hospitality sector will be taxed as follows:

GST RATES FOR HOTELS

Hotels in 5 Star category and any other hotel charging Rs. 7500 per room per night have been kept under the highest bracket of 28% tax (we find this extremely high and unreasonable but it seems the government thinks hotel stays in 5 star is an ultra-luxury!!)

The other rate bands are:
Rs.2500-7499 18%
Rs.1000-2499 12%
Rs. 1-999 No tax
Food will be charged at 18% in all categories. TAX RATES PRIOR TO GST

Prior to GST, the average tax was between 15-18% depending on the itinerary and category of hotels used. The rate structure was very complex and was driven by state taxes and union taxes. In some cases the state taxes differed by season, rack rate, with / without meals etc. As we got rates inclusive of taxes in many cases, it is very hard for us to identify the base rate for a large number of hotels. As such a direct correlation between the old and the new rates cannot be made.

STAND ALONE HOTEL USAGE

These are basically beach or city hotels where we are not using any other ground service. The tax rates for the same will need to be calculated by us, once we have received firm contracts from the hotels. This is being delayed by most hotels as they too don’t seem to have clarity on the way forward i.e. is the rate based on meal plan or room only, does the rack rate have any influence on the tax slab etc.

GUIDES

Prior to GST, guides were exempt from service tax as they fell below the threshold limit. With GST their services will be subject to 18% GST. The impact of this increase is factored into the impact analysis below.

MONUMENT FEES

In the case of monuments, the government has exempted entrance charges for monuments managed by Archaeological Survey of India. We are now getting clarity on all other monuments that could be privately owned or fall under other categories.

GROUND TRANSPORTATION

The rate for the ground transportation which was earlier 6% has been revised to 5%.

TRAIN FARE

The rate for train fare will remain unchanged.

DOMESTIC AIRFARE

The GST rate for the economy class will be 5% and 12% on other than economy. The earlier tax was 6% on Economy class and 9% on other than economy class.

ALL OTHER SERVICES

All services other than the ones mentioned above are liable to 18% GST.

GST FOR SERVICES PROVIDED BY DMC’S

The GST on a tour packages / services by DMC’s will be charged at 5% of the total invoice. Prior to GST we were charging you a service tax which was 4.5%.

IMPACT AS WE UNDERSTAND IT

Based on the various studies done by our consultants E&Y as well as the information being received from various government and trade bodies involved with GST, our estimate is that the expected net impact of these tax changes would be:

For an itinerary using 5 star hotels and / or hotels above Rs. 7500: 6-8% over the current cost price quoted by us to you.

For packages using 4 star and below with hotel rates less than Rs. 7500: 3-5% over the current cost price quoted by us to you.

OUR OPINION

This is the most important tax reform move by the government in years and as such required unprecedented resources and technology for implementation. There will be a period of about three months which will be required to let things settle.

The key problem today is that the hotels are unable to come up quickly and efficiently with a rate structure. It seems they are either not clear on the implementation or are going to use this opportunity to increase their rates. Either way, we will be keeping a close watch on the same and shall protect your interest in India.

We would also request you to please bear with us for the next few days as we need to ensure we contract right with the hotels and get the maximum benefit for you. We know some of you have been rather concerned about the delay in rates but this is an unprecedented year with this huge tax change and as such our recommendation is to wait till 15th July to get firm rates from us. If however, you insist on firm rates before this date, we can give you an estimate based on the knowledge we have so far and then send you the revised rates once they have been firmed up with the hotels. Please appreciate that the GST rate that we have to charge is clear, it’s the hotels that are causing this delay.

The advantage with this implementation would be that you will not receive tax increases mid-year for different states and services. Our understanding is that the rate can only be changed, once a year during the budget.

My team and I are working to ensure that we send you accurate information and keep a close eye on the rates to ensure you retain your commercial advantage in India.

Please feel free to contact a member of my team or me on this subject of GST and we would be happy to answer your questions.

Best Regards,

Dipak Deva Managing Director

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