Higher service tax rate to be passed on to customers:Thomas Cook

With the service tax rate going up to 60 percent from 30 percent, cost to the consumer will go up, said Thomas Cook COO, Mahesh Iyer. New rates will be effective January 22. Currently service tax is charged on 10-40 percent of total bill based on services. Tour operators offering a package tour had to pay service tax on 25 per cent of the bill amount, on 10 per cent of the bill amount if the tour operator only arranged or booked accommodation for a person in relation to a tour, and on 40 per cent of the bill amount if any other tour-related services were offered.Iyer said the implementation period is too short and their forum will talk to the government and convey the hardships the consumer will have to face. As per a media report, travel and tour operators have urged the government to exempt service tax on foreign exchange earned on inbound tours in the upcoming Budget. While seeking lower tax rate, the players also want the government to fix the GST rates for the sector after taking due consideration of the GST/VAT being levied by neighbouring countries.Below is the transcript of Mahesh Iyer’s interview to Sumaira Abidi and Prashant Nair on CNBC-TV18.Prashant: Could you tell our viewers what was the rate earlier, what is the rate now and if you can, with the use of an example, tell us how will this change things in terms of how much you will have to pay and how much of that burden will the customer have to pay?A: Package tours, as we call our tour operating, always operated under abated rate scheme of the service tax scenario. What used to happen previously, to give you an example, if a package costed Rs 100, 30 percent of that was taxable and in effect, that meant that 30 percent of the 14 percent service tax, which was roughly about 4.5 percent is what the customer used to pay as service tax. That is something that we passed on to the customer. Now the reason why this was getting passed on to the customer is because these services are provided outside India and not in India. So, if it is provided outside India, there is no input credit that is available for the supplier of the service. So, clearly, it was something that we used to pass to the customer completely.Now, the notification that came out on Thursday, late in the evening, effectively talks about an increase in the slab from 30 percent to 60 percent which in effect means the 4.5 percent that the customer used to pay, now will move up to 9 percent. That is a 100 percent increase in terms of taxability and that is something that will get passed to the customer for the simple reason, as I mentioned, is that there is no input credit that is available to tour operators because the service is provided outside India. The other factor that is a little dampener is the time that is allowed because we are talking about implementation in less than about a week which is January 22, that is the Sunday that is coming. Now, in this short a time, to go back to the consumer and talk to him because this is a time when tour operators typically start building their pipeline for their summer bookings. And when we have picked up bookings, obviously, we were doing at the 4.5 percent rate. Now, to go back to those same set of customers and tell them the price has increased is a difficult conversation to have. And more increasingly, going forward, customers who come and book will have to pay the higher service tax rate. So, if I put in an example, Rs 1,00,000 is the package cost, effectively, the cost goes up by about Rs 4,000.Sumaira: Is there any representation that you are making to the government given that it comes so close to the Budget?A: Yes, we are doing so. While you will appreciate that there is a blackout period at this point in time, I am sure the government will not take any recommendations. But we are making, through our forums, to talk to the government bodies and see as to how we can explain this situation and more importantly, the hardships that customers will face because already with demonetisation, there was a subdue on us in terms of demand and this should not further impact.Prashant: But, you will be able to pass this on. The cost of the consumer goes up, as you said.A: Correct. Definitely, we will have to pass it on, as I mentioned, because there is no input available to us. So, effectively this cost gets passed to the consumer. To that effect the price to the consumer will go up.Sumaira: And needless to say now, does it become null and void to ask you if there are any expectations from the Budget?A: One of the ways to look at this is also that maybe this is preparation for the goods and services tax (GST). And when we were in dialogue with the government, we were trying to impress upon them that in the GST regime, the tour operating services, because the government is pushing tourism as one bright sector or sunlight sector that they want to grow in. So, we were very hopeful that the lower end of the band is what they will look for, the tour operating services, given the government’s impetus for tourism. So, I am not too sure which direction this goes, but we will have to wait for the Budget to see as to what the government has in store. Maybe something else comes in.