JANUARY 28, 2017

By Hardik Shah & Rutvij Modi

RECENTLY vide Notification 4/2017-ST dated January 12, 2017 [effective 22.01.2017],the CBEC has trimmed the abatement available to the tour operators. However, the impact of such amendment is not limited to the increase in the effective rate of service tax, rather the impact is far reaching. The amendment has raised many questions which remain unanswered. Before dwelling into those questions, it is imperative to compare the new provisions with old provisions.

Old vs. New provisions

With introduction of negative list based service tax from July 01, 2012, all the services have been made taxable except services that stand included in the Negative List. Tour operator's services not being featuring in such negative List constitutes taxable service in the present regime of taxation of services. However, specified abatement has been prescribed vide notification 26/2012-ST dated June 20, 2012. Earlier, three different abatement rates were prescribed for tour operator's services which were in place from 01.07.2012 to 31.03.2016. Subsequently, vide Budget 2016-17 the abatement rates were reduced to two. The recent amendment which is effective January 22, 2017 has further trimmed abatement rate. The amendment has provided only one abatement rate which is further subject to specified conditions.

A. Provisions from 01.04.2016 to 21.01.2017:

B. Provisions with effect from January 22, 2017:

Analysis

With the amendment of January 2017, it would now be possible for the tour operators to claim CENVAT credit of input service tax which was hitherto not possible. The restriction on availment of CENVAT credit in respect of inputs and capital goods however continues, meaning that a tour operator will not be eligible to avail such credit. Given the fact that the abatement percentages have been significantly reduced, the facility of availing CENVAT credit for input service tax is expected to bring much relief to the trade inasmuch as it would reduce the cost of input services and in the process enable, to an extent, neutralization of the effect of reduction in abatement percentage that would impact the pricing.

One of concerns that emerges from the wordings of the abatement prescribed vide amendment of 22nd January 2017 is whether or not in the absence of arranging transportation, the tour operator would still be eligible for the abatement of 40%. This is because one of the conditions for being eligible to the abatement of 40% states that the bill issued for this purpose indicates that it is inclusive of charges of accommodation and 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. It would be significant to note that in terms of abatement prevailing up to 21st January 2017, the tour operator was eligible to 90% abatement if he solely arranged for accommodation but without the benefit of CENVAT credit. Therefore, the concern is whether or not abatement of 40% will be available if in a situation, a tour operator is only providing the services of booking an accommodation for a tourist or is it that the abatement will be available only if in addition to accommodation, transportation is also provided.

Let us consider the following illustration:

Example:

Assume that tour operator has booked accommodation for Rs. 1,00,000/- with a Hotel. Hotel invoice shall consists of accommodation charges of Rs. 1,00,000/- plus service tax amounting to Rs. 9,000/- considering the abatement of 40% available to the Hotel service provider. Under the erstwhile provisions, Rs. 1,09,000 shall be cost to the tour operator whereas under the new provisions cost to the tour operator shall be Rs. 1,00,000 * only as the Cenvat credit shall be available. Now, assuming the margin of Rs. 5,000 of tour operator, let us see the impact of new provisions by considering abatement and also not considering abatement:

(*Cenvat Credit of Swachh Bharat Cess which amounts to Rs. 300 has been considered for the purpose of cenvat for the ease of calculation)

If, therefore, the provisions effective 22nd January 2017 are read so as to mean that a tour operator will be eligible for the abatement of 40% of the value of taxable service only if he is providing the service of arranging for transportation in addition to arranging for hotel accommodation and not otherwise then the price of tour package will increase substantially despite the availment of CENVAT credit of the service tax on hotel accommodation.

Although the intention of the legislature does not appear to be taking away the benefit of abatement available prior to the amendment of 22 nd January 2017 in case of arranging for accommodation only, Revenue contending that the benefit of abatement will be available only if in addition to accommodation transportation is also arranged cannot altogether be ruled out.

It is, therefore, observed that the conditions of the abatement notification are also strictly worded. As already stated, it has been categorically prescribed that benefit of the abatement shall be available only if the bill issued indicates that it is inclusive of charges of accommodation and 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. The usage of word 'and' may lead to an interpretation that the abatement shall be available only if cost of transportation and accommodation charges, 'both' are part of the tour cost. Absence of any will render the tour operator ineligible of such abatement. Further, the question may arise what if the customer himself books air/train tickets for his journey, whereas the rest of the booking and tour arrangement is done by the tour operator. Further, in case of outbound tours, what if the local transportation is arranged by the tour operator whereas to/from transportation booking is done by the customer himself? In such scenario, will the tour operator be able to enjoy abatement?

Conclusion:

The amendment has, therefore, left important issues unanswered. The purpose would be better served, if the CBEC issues necessary clarification having regard to the previous abatement notification and the various dimensions of the services of a tour operator.

(Mr. Hardik Shah is Senior Manager, and Mr. RutvijModi is Assistant Manager with Deloitte Haskins and Sells LLP.)