In an otherwise buoyant year for tourism, the demonetization measures by the Indian government towards the fag end of 2016 caught the backpacker segment in both inbound and domestic sectors by surprise. Many from this whimsical travel segment were unable to pay for necessary travel services in cash, due to unavailability of currency from ATMs and the relatively low penetration of credit/debit card transaction facilities in many destinations.
Those who booked their holidays in advance were spared the trouble mostly, except when they chose to buy curios/handicrafts or necessities like medicines over the counter.
Nevertheless, the timing of the demonetization during a period, which is also the peak season (starting October till April) for inbound tourism in India, drew flak from businesses including hotels, airlines, and travel agencies. It may be a tad difficult to convince them of the long-term view of demonetization which sees the industry becoming more organized. Many hotels chains have introduced initiatives like digital wallets to make online payments easier.
The tourism and hospitality industry has reacted sharply to the Union Ministry of Finance’s latest amendment to its earlier notification on CENVAT Credit and Service Tax, seen as a forerunner to GST. The service tax has doubled to 9 per cent from the earlier 4.5 per cent effectively rendering India expensive when compared with other foreign destinations. The amendment effective from 22 January 2017 was hastily introduced and the industry was left with no reaction time to discuss the issue with the government and confusion continues to reign within the tourism community. The government could have waited until the GST implementation from April 1, 2017 for such an implementation. While tour operators will pay a higher tax, they will gain by way of CENVAT credit. The immediate impact will be on leisure and FIT travelers who will end up paying more in comparison to corporate travelers. This taxation on India-based operators and businesses has rendered them uncompetitive in relation to foreign-based tour operators and online booking engines who do not come under the purview of the service tax. The outbound tour industry will be affected majorly due to the CENVAT amendment. There is no rationale to increasing taxes on services provided in a foreign destination.
Online booking engines
The tour operations industry is becoming largely redundant due to online booking engines assuming prime significance in global travel. For a large destination like India, such a trend means tour operators will become glorified transport operators since customers will directly book hotels online and approach a local tour operator to assist with the ground services like transport, sightseeing and allied services. In a sense, this clearly points to the need for tour operators with superior destination knowledge to bridge the gap in providing quality experiences. A governmental intervention may be necessary to save the small and medium tour operators from shrinkage and an eventual demise.
The recent clarification by the government on the service charge pertaining to food bills in restaurants and hotels has led to large-scale confusion and spats in public places. The clarification says the customer can have the service charge waived in case of dissatisfaction. However, there are no clear norms on how satisfaction can be ascertained while judicial precedents that support service charges do exist. Obviously, there needs to be a set limit on such charges without leaving it to the discretion of the establishment. This sector has majorly suffered during the demonetization drive and needs support since most of the payments are cash-based.
As the Union Budget comes up, many of us in the tourism industry expect sops in the form of lower taxes and other policy measures to alleviate the post-demonetization blues, generate employment, and help India emerge as a key destination for tourism. First of all, government should recognize tourism as a major contributor of GDP and give it the status of an export industry, which continues to enjoy exemption from service tax. In India, hotels presently charge a monstrous 25 per cent tax that contributes detrimentally to the experience cost of a destination. Hotels in Hong Kong do not charge any form of tax and this has helped them emerge as a premier tourism destination.
A long-term tax holiday/subsidy might just be the resuscitation needed by the tourism industry to flip back on track. Hotel projects need a one-window clearance in light of the present scenario where umpteen licenses like Trade, Food & Safety, VAT Registration need individual requests to be made to different bodies operating on unrelated timelines. Currently, bank interest for loans towards hotel projects attract anywhere between 12-14 per cent in India, while in the US it is anywhere between 2-3 per cent. A sensible interest rate may be announced to promote infrastructure building, which will leverage room count of destinations.
In terms of policy, the e-visa facility offered by India, though extended recently to 150 countries, demands that applications be made 4 days in advance. The poor implementation of this facility creates havoc during the application filing process as is experienced by many foreign travelers wishing to travel to India on short notice. India needs to progress to a visa-on-arrival regime similar to what our neighboring country, Sri Lanka, has implemented to achieve significant growth in international arrivals.
For Kerala, which receives about 10% of all international arrivals to India, lesser direct connectivity of foreign carriers when compared to Mumbai and Delhi is a serious lacuna. The congestion in these metro airports has not opened up any new flight connections to Kerala despite its recognition as one of the top tourist destinations in India and the existence of an open skies policy. Sri Lanka, which competes favorably with Kerala in terms of similar product offering, enjoys air connectivity of an unprecedented level and this deflects international tourist attention.
2017 is a watershed year for Indian tourism and the Government will have a key role in deciding the future of the industry that has given India so much yet has received so little in terms of support and encouragement.