Amitabh Khemka, COO,Sthir Advisors LLP

Tour operators – changes in service tax, foundation for GST

Date : January 24 2017

On January 12, 2017, Government of India issued a Notification[1], which cameinto force on Sunday, January 22, 2017, making amendments in the abatementpercentages in respect of services provided by a ‘tour operator’. TheNotification has reduced the abatement percentages significantly, which hascreated uproar amongst the ‘tour operators’. The Notification, however,appears to be laying foundation for tour operators to prepare for Goods andServices Tax (GST), which is likely to be introduced from July 1, 2017.

Effective rate of tax on services by a tour operator

The abatement percentages were as follows, effective from July 1, 2012:

Description of taxable service AbatementServices by a tour operator in relation to a package tour 75%Services by a tour operator in relation to a tour, if the touroperator is providing services solely of arranging or bookingaccommodation for any person in relation to a tour

90%

Services by a tour operator in relation to any services otherthan specified above

60%

These abatement percentages were amended to as follows, effective from April 1, 2016:

Description of taxable service AbatementServices by a tour operator in relation to a tour, only for thepurpose of arranging or booking accommodation for anyperson

90%

Services by a tour operator in relation to tours other thanabove

70%

Now, effective from Sunday, January 22, 2017, the abatement percentages are as follows:

Description of taxable service AbatementServices by a tour operator 40%

Hence, the effective rate of tax[2] on services by a tour operator has increased from 1.5 / 4.5 per cent (90% /70% abatement) to 9 per cent (40% abatement). This rate may further increase if the rate of tax on services isproposed to be increased in the forthcoming Union Budget, to be announced on February 1, 2017.

Determination of the effective rate of tax for the cut-off transactions would have to be done after determiningthe point of taxation under Rule 4 of the Point of Taxation Rules, 2011.

Condition to be fulfilled for availing the abatement

The abatement is subject to fulfilment of the following conditions:

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Condition before January 22, 2017 Condition from January 22,2017

90 per cent abatement - The invoice, bill orchallan issued indicates that it is towardsthe charges for such accommodation. This exemption shall not apply in such caseswhere the invoice, bill or challan issued bythe tour operator, in relation to a tour,includes only the service charges forarranging or booking accommodation forany person but does not include the cost ofsuch accommodation.

70 per cent abatement - The bill issued forthis purpose indicates that it is inclusive ofcharges for such a tour and the amountcharged in the bill is the gross amountcharged for such a tour.

The bill issued for thispurpose indicates that it isinclusive of charges ofaccommodation andtransportation requiredfor such a tour and theamount charged in the billis the gross amountcharged for such a tourincluding the charges ofaccommodation andtransportation requiredfor such a tour.

From the changes in the abatement percentages from time to time, it prima facie appears that both the entrieswith 90% and 70% abatements are merged together into a single entry with 40% abatement. In the abatemententries for the period from July 1, 2012 to January 21, 2017, where the tour operator was providing servicessolely of arranging or booking accommodation for any person in relation to a tour; it was being considered asservices by a tour operator in relation to a tour.

Tour operator for this purpose is defined[3] as, “tour operator means any person engaged in the business ofplanning, scheduling, organizing, arranging tours (which may include arrangements for accommodation,sightseeing, or other similar services) by any mode of transport, and includes any person engaged in thebusiness of operating tours”. The term ‘tour’ is not defined currently. However, it was defined[4] earlier as,“tour means a journey from one place to another irrespective of the distance between such places”. Fromthese definitions, it may prima facie appear that to constitute a tour, transportation / journey is required; it mayor may not include accommodation.

For abatement, the thrust has been that the charges should be the gross amount charged for the tour oraccommodation and not service charges alone for such tour or accommodation. The condition effective fromJanuary 22, 2017, in the same spirit, requires that the charges should be the gross amount charged. However, the new condition specifies that the charges should be inclusive of charges of accommodation andtransportation. A doubt arises what if the charges are inclusive of accommodation but not transportation orvice versa. Would it still be considered a ‘tour’ / ‘services by a tour operator’ for the purposes of abatement? The word “and” is normally conjunctive and word “or” is normally disjunctive but at times they are read as viceversa to give effect to the manifest intention of the Legislature as disclosed from the context. However, if theconjunctive sense of the word ‘and’ also sub serves the object of the provision then the word “and” cannot beconstrued as “or”. In the given amendment effective from January 22, 2017, the intent / object is apparentlynot explicitly spelt out.

Incidentally, there is another entry as follows in the same abatement Notification with the same abatementpercentage of 40 per cent:

Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential orlodging purposes

The term, ‘renting’ is defined[5], basis which it appears that the tour operators solely arranging or bookingaccommodation are themselves not allowing, permitting, or granting access, entry, occupation, use or anysuch facility and hence, tour operators would not be covered by the above entry.

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If arranging or booking accommodation by tour operators is regarded as neither covered in the entry “servicesby a tour operator” nor in “renting of hotels etc.”, then such services would attract tax without any abatementon the gross amount charged including charges for accommodation. The amendments do not give theimpression of such intent.

Condition for availability of input tax credit

The abatement is subject to fulfilment of the following conditions in respect of input tax credit[6]

Condition before January 22, 2017 Condition from January 22,2017

CENVAT credit on inputs, capital goodsand input services other than inputservices of a tour operator, used forproviding the taxable service, has not beentaken under the provisions of the CENVATCredit Rules, 2004.

CENVAT credit on inputsand capital goods used forproviding the taxableservice, has not been takenunder the provisions of theCENVAT Credit Rules, 2004.

Hence, effective from January 22, 2017, the tour operator would be eligible to claim input tax credit in respectof ALL input services, which was hitherto restricted to input services of a tour operator only.

Some of the services that a tour operator may use for providing its output services are:

Services Currentabatement

Credit allowed to suchservice provider on his

input servicesTransport of passengers by rail 70% YesBundled services by way ofsupply of food or any other articlefor human consumption or anydrink, in a premises together withrenting of such premises

30% Yes

Transport of passengers by air 60% / 40% YesRenting of hotels, inns, guesthouses, clubs, campsites or othercommercial places meant forresidential or lodging purposes

40% Yes

Renting of motorcab 60% Yes, subject to specifiedlimits

Transport of passengers by acontract carriage (other thanmotorcab), radio taxi, a stagecarriage

60% No

Tour operator would be eligible to claim input tax credit in respect of ‘input services’. Tour operator would alsobe eligible to claim input tax credit of service tax and krishi kalyan cess paid on its operational expenses suchas air travel agent, rail travel agent, travel agent, advertisement or sales promotion, accounting, auditing,recruitment, computer networking, security, business exhibition, legal services, etc. This would reduce thecost to a ‘tour operator’ significantly.

In all probability, the effective price to the end customer may nearly be the same (or may reduce also) fordomestic tours, after considering such reduction in the costs. For this purpose, the tour operators need topass-on the benefit of such reduction in costs to its customers. For outbound tours outside the taxableterritory, there would be instances where the tour operator is required to charge service tax to his customer,basis the place of provision of services[7], however, on the input service side there is no service tax; the place

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of provision of services[8] being outside the taxable territory[9]. In such instances the effective price to the endcustomer is likely to increase.

Currently, the tour operators availing the benefit of 90 / 70 per cent abatement are not availing any input taxcredit. Many of the services providers providing services to tour operators are currently not disciplined to give‘tax invoice’ with appropriate disclosures, for the tour operator to claim input tax credit. Certain on-line /ecommerce participants may have to revisit their service tax positions such that tour operator is in a position toclaim input tax credit. Any loss of input tax credit to the tour operator would impact his bottom-line and/or hiscompetitiveness.

Laying foundation to prepare for GST

Under GST, the tour operators would claim input tax credit of GST paid on goods and services, both. In whichevent, there would be no abatement and GST would apply on gross amount charged at the applicable rate. Itis necessary that tour operators get familiar with the understanding (including impact on costs) of input taxcredit, compliances associated with it and changes required in IT and accounting systems. If there is uproarnow at 15 per cent tax with 40 per cent abatement; there could be mayhem if such a foundation is not laid forpreparing towards GST, especially when the rate of tax is likely to be 18 per cent without any abatement.

[1] Notification No. 4/2017-Service Tax dated January 12, 2017 amending Notification No. 26/2012-ServiceTax dated June 20, 2012

[2] Total tax 15 per cent - 14 per cent Service Tax, 0.5 per cent Swachh Bharat Cess and 0.5 per cent KrishiKalyan Cess

[3] As given in Notification No. 26/2012-Service Tax dated June 20, 2012

[4] Erstwhile Section 65(113) of Chapter V of the Finance Act, 1994, as applicable up to June 30, 2012.

[5] Section 65B(41) of Chapter V of the Finance Act, 1994

[6] CENVAT Credit under the CENVAT Credit Rules, 2004

[7] Rule 8 of the Place of Provision of Services Rules, 2012

[8] Rule 4(b) of the Place of Provision of Services Rules, 2012

[9] Taxable territory would mean the territory of whole of India except the State of Jammu and Kashmir

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