Interpretation of New Notification for Tour Operators


In this article, an attempt has been made to interpret the various aspects of this New Notification. The recent amendment, instead of clarifying the issue, creates more doubts for the industry, specially in relation to taxability of the stand-alone hotel booking transactions, in the hands of tour operators. The key points regarding the above amendment are:

1. IMPACT ON COST OF TRAVEL:

Under revised scheme, an abatement of 40% is available on the value in respect of all services provided by the tour operator. Effectively, Service tax is payable on only 60% of gross amount charged. The abatement is available only when bill issued for such tour is inclusive of charges of accommodation and transportation for such tour.

In any case, the abatement scheme is only optional and the assessee may or may not avail the benefit of abatement while paying Service Tax.
As seen in the illustration that follows, the introduction of this amendment, will cause the cost of travel, particularly in relation to tours, to increase in the short-term.

2. ONLY 1 CATEGORY OF SERVICE

Once this notification comes into effect, only 1 category of Tour Operator shall exist for abatement purposes, unlike earlier, when there were 2 categories.


Timeline

Category of Service

% Abatement available

Prior to Amendment

(on or before 21.01.2017)

Arrangement/ Booking of Accommodation

90%

Other Category of Tour Operators
(incl. Package Tour)

70%

After Amendment

(on or after 22.01.2017)

Services by a Tour Operator

40%


 Of course, to avail the benefit of abatement, various other conditions have to be satisfied. Mere provision of above service is not the criteria.

3. CONDITIONS FOR AVAILING ABATEMENT:

As mentioned above, the various conditions to be met, for claiming the abatement both before and after amendment, are as follows:


Timeline

Category of Service

General Conditions

Special Condition

Prior to Amendment

(on or before 21.01.2017)

Arrangement/ Booking of Accommodation

No CENVAT Credit claimed on Inputs, Capital Goods & Input services (other than from input service from another tour operator) even if used for providing the taxable service.

1. The invoice Indicates that it is towards charges for such accommodation

2. No abatement shall be available if the invoice includes only the booking service charges and not the cost of accommodation.

Other Category of Tour Operators
(incl. Package Tour)

1. The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

2. The bill issued indicates that it is inclusive of charges for such a tour.

After Amendment

(on or after 22.01.2017)

Services by a Tour Operator

(Only 1 category of Tour Operator service)

No CENVAT Credit claimed on Inputs & Capital Goods.

(Means CENVAT credit on all  Input services can be availed)

Refer Note Below


Note: The bill issued for this purpose indicates that it is inclusive of charges of:

1. accommodation and
2. transportation required for such a tour

And the amount charged in the bill is the gross amount charged for such a tour including the charges of accommodation and transportation required for such a tour.

Hence, it is interpreted that, in the revised scheme, the abatement of 40% is available only if the invoice issued by the Tour Operator contains charges towards both accommodation and transportation required for the tour, among other charges.

4. CENVAT CREDIT AVAILABILITY:

In the amended notification, only credit of Capital goods and Input used in the provision of taxable service is disallowed. That means, credit of Service tax paid on all Input services used in the provision of taxable service shall be available to tour operator. Therefore, Tour operator can avail credit of all input service used for the provision of tour operator services.

This comes as a great relief to the tourism industry, as it will help in pushing out the cascading effect of taxes, atleast to the extent of credit on input services.

5. This amendment is another step by the Government of India, towards the implementation of GST, brought in to rationalize the abatement scheme for Tour Operators.

6. ABATEMENT HAS ALWAYS BEEN OPTIONAL:

As mentioned earlier, abatements are optional. The Tax-payer may opt for abatement only if it results in lesser tax out-flow. If one is paying significant tax on inputs, Capital Goods and input services, then in such case, he may choose to pay the service tax on entire gross value charged and can avail full CENVAT credit under CENVAT Credit Rules, 2004 in respect of such Inputs, Capital Goods and Input service used in the provision of tour operator service.

Hence, the taxpayer must analyze his own financial model and choose whether to opt for Abatement or not.

7. An illustration is given below to bring out the overall impact of the Notification on the applicability of abatement and the availability of CENVAT Credit in various instances.

Illustration on Notification No. 04/2017 dated. 12.01.2017 - Tour Operator Service

Q. M/s. XYZ Tours & Travels has raised invoices on 3 clients on 28.01.2017, the details of which are as follows:


Name of Client

Tour Plan availed

Gross Amount Charged

Invoice includes

Mr. A

All Inclusive Tour - 6D/5N to Australia

6,19,965/-

  • Cost of Hotel Accommodation,
  • Flight Charges (incl. Return Trip)
  • Cab Charges to/from Airport
  • Food (3 meals/day)
  • Sight-seeing
  • Entry Fee at Major Attractions
  • Miscellaneous Service Charges

(Hotel Accommodation + Transportation charges are charged in invoice)

Mr. B

Sight-Seeing Package - 4D/3N - Coorg, Karnataka

34,500/-

  • Cab Rental Charges
  • Entry Fee
  • Other Booking Charges

 (Hotel Accommodation + Transportation charges not covered)

Ms. C

Holiday Tour - 5D/4N - Assam

1,15,000/-

  1. Cost of Hotel Accommodation
  2. Other Charges

(Transportation charges not covered)


XYZ does not avail CENVAT Credit on Inputs & Capital Goods. However, it was availing input services from following parties (Service tax shown separately in invoice):


Nature of

Input Service

Taxable Value of Input services

Service Tax

(ST)

Swachh Bharat Cess*

(SBC)

Krishi Kalyan Cess

(KKC)

Total Amount eligible for CENVAT Credit)*

Total Invoice Amount

Trip Advisor

(Another Tour Operator)

1,00,000

14,000

500

500

14,500

1,15,000

Travel Consultants

20,000

2,800

100

100

2,900

23,000

Tour Guides

10,000

1,400

50

50

1,450

11,500

Total

1,30,000

18,200

650

650

18,850

1,49,500


*Swachh Bharat Cess paid on input services is not eligible for CENVAT Credit.

XYZ Tours & Travels wants to avail abatement benefits, if any.

Determine the tax liability on the above invoices in the pre- and -post amendment scenarios.

Solution: Pre-Amendment Scenario (upto 21.01.2017):

In this scenario, the taxability of such a service was governed by Notification No. 26/2012 dated. 20.06.2012 (Sl. No.11) as amended by Notification No.08/2016 dated 01.03.2016. Accordingly, the abatement rates against the 2 category of services are:

1. Service of Arrangement/ Booking of Accommodation - Abatement of 90% was available was available on Gross Amt charged.
2. Other Category of Tour operators (incl. package Tours) - Abatement of 70% was available on Gross amount charged.

I. Determination of Taxable Portion


Name of Client

Remarks

Taxable Portion (%)

Taxability Portion (Rs.)

CENVAT Credit Available

Mr. A

No 90% abatement since service of tour operator is not solely of arranging/booking accommodation for any person.

But 70% abatement is available since Cost of accommodation and various other charges are included in invoice.

30% of Gross Amt Charged

1,85,990

(Rs. 6,19,965*30%)

Since abatement benefit is claimed in two cases, CENVAT Credit is restricted to Rs. 14,500 being CENVAT Credit on Input Services of other Tour Operators.

Mr. B

Abatement of 70% since it's a package tour and invoice does not contain cost of accommodation.

30% of Gross Amt Charged

10,350

(Rs. 34,500*30%)

Ms. C

Abatement of 90% since invoice indicates that it is mainly towards Accommodation charges

10% of Gross Amt Charged

11,500

(Rs. 1,15,000*10%)


(Note: Where Abatement is claimed, Service tax is payable on non-inclusive basis. That means tax payable is flat 15% of the amount after abatement)

II. Determination of Tax payable


Sl.No.

Particulars

Mr. A

(ST on Non- inclusive basis)

Mr. B

(ST on Non-inclusive basis)

Ms. C

(ST on Non-Inclusive Basis)

Total

A

Abatement Availed

70%

70%

90%

 

B

Taxable Value

1,85,990

10,350

11,500

2,07,840

C

Service Tax Payable

14% of (B)

26,039

1,553

1,610

29,098

D

SBC - 0.5% of (B)

930

52

58

1,040

E

KKC - 0.5% of (B)

930

52

58

1,040

F

Total Tax + Cess

27,898

1,657

1,726

31,178

G

CENVAT CREDIT ON

ONLY INPUT SERVICE FROM OTHER TOUR OPERATORS

ONLY INPUT SERVICE FROM OTHER TOUR OPERATORS

ONLY INPUT SERVICE FROM OTHER TOUR OPERATORS

 

H

Service Tax **

-

-

-

(14,000)

I

SBC **

-

-

-

-

J

KKC **

-

-

-

(500)

K

Total Credit

-

-

-

(14,500)

L

NET TAX PAYABLE

-

-

-

 

M

Service Tax (C-H)

-

-

-

15,098

N

SBC (D-I)

-

-

-

1,040

O

KKC (E-J)

-

-

-

540

P

Total (M+N+O)

     

16,678


** Since XYZ Tours & Travels has availed Abatement benefit in case of Mr. B & Ms. C, it cannot avail CENVAT Credit on inputs, capital goods or input services other than from services of other tour operators. Hence CENVAT Credit on Services of Tour Guides & Travel Consultants have not been availed. [No credit shall be available on Swachh Bharat Cess paid. However Krishi Kalyan Cess paid on Input Services can be adjusted against KKC payable on taxable output services]

Post-Amendment Scenario (on or after 22.01.2017):

Once the new notification comes into effect, there will be only one category of Tour Operator service from 22.01.2017 and the abatement has been drastically cut down to 40%. The abatement may be availlable to only those tour operators who satisfy the conditions as mentioned in the beginning of this article.

I. Determination of Taxable Value of Service (continuation of above illustration)


Name of Client

Remarks

Taxable Portion (%)

Taxability Portion (Rs.)

CENVAT Credit Available

Mr. A

Abatement of 40% is available since invoice includes Cost of Accommodation & Transportation charges, among other charges.

60% of Gross Amt Charged

3,71,979

(Rs. 6,19,965*60%)

Rs. 18,850/- being full credit on ALL INPUT SERVICES

Mr. B

No Abatement since the invoice neither contains cost of accommodation nor charges towards transportation.

100%

30,000

(Rs. 34,500*100/115)

Ms. C

No Abatement since the invoice does not include Charges towards Transportation required for the tour.

100%

1,00,000

(Rs. 1,15,000*100/115)


(Note: Where Abatement is not claimed, tax liability has been computed on inclusive basis. That means the gross amount charged is taken to be inclusive of service tax and the liability is determined accordingly)

II. Determination of Tax payable


Sl. No.

Particulars

Mr. A

(ST on Non- inclusive basis)

Mr. B

(ST on Inclusive basis)

Ms. C

(ST on  Inclusive Basis)

Total

A

Abatement Availed?

YES. 40%

NO

NO

 

B

Taxable Value

     3,71,979

         30,000

     1,00,000

5,01,979

C

Service Tax Payable

14% of (B)

         52,077

           4,200

         14,000

           70,277

D

SBC - 0.5% of (B)

           1,860

               150

               500

             2,510

E

KKC - 0.5% of (B)

           1,860

               150

               500

             2,510

F

Total Tax + Cess

         55,797

           4,500

         15,000

           75,297

G

CENVAT CREDIT ON

ALL INPUT SERVICES

ALL INPUT SERVICES

ALL INPUT SERVICES

 

H

Service Tax ***

-

-

-

(18,200)

I

SBC ***

-

-

-

-

J

KKC ***

-

-

-

(650)

K

Total Credit

-

-

-

(18,850)

L

NET TAX PAYABLE

-

-

-

 

M

Service Tax (C-H)

-

-

-

52,077

N

SBC (D-I)

-

-

-

2,510

O

KKC (E-J)

-

-

-

1,860

P

Total (M+N+O)

     

56,447


*** Once the new notification comes into effect, XYZ Tours & Travels is free to claim 40% abatement along-with CENVAT Credit on ALL INPUT SERVICES provided it was used in relation to providing the taxable output service. Hence, where the service provider claims such abatement, only CENVAT Credit on Inputs & Capital Goods cannot be availed here-forth. [No credit shall be available on Swachh Bharat Cess paid. However Krishi Kalyan Cess paid on Input Services can be adjusted against KKC payable on taxable output services]

In the above illustration, owing to the lack of clarity, even standalone hotel-booking transactions (in the case of Ms.C) done by Tour Operators have been considered to be ineligible for availing abatement of 40%, since the new notification specifically requires that the Tour Operator's invoice should also include TRANSPORTATION CHARGES, if he wants to claim abatement.

On a conclusive note, the cost of travel (esp. Tours) is bound to increase, atleast in the short term. These amendments may also disrupt the existing financial models of the tours and travel industry. However, introducing cut-backs on one hand and increasing CENVAT credit availability for input service on the other, is apparently not such a bad move. This will help nullify the effect of increase in cost of travel industry to some extent.

The author believes that there may be further clarification regarding this notification, once the Union Budget 2017-18 is announced.

(Disclaimer: The views and opinions expressed in this article are those of the author. The illustration given above is strictly based on the interpretations of the author. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, the author assumes no responsibility for the consequences of use of such information.)

More »


Sanjay S 
on 31 January 2017
Published in Service Tax
Views : 2160
Other Articles by - Sanjay S
Report Abuse

Total likes : 2 times







×
close x
Online GST Class    |    x