Navigating the Future – The Impact of Tax Rates on Travel and Tourism – ET TravelWorld

Travel serves as a window through which the world perceives us. It’s through shared experiences and cultural exchanges that India’s rich heritage and diverse landscapes come alive. This makes tourism a vital sector, not only for showcasing our identity globally but also for connecting Indians within our own country.

With India’s vast and varied regions, travel fosters understanding and unity, allowing us to experience the majestic land and the vibrant communities that make up our nation. Therefore, Travel and Tourism is a very important services sector for india.

In recent years, India has emerged as a formidable player in the global services export market. The services sector is now the largest contributor to India’s GDP, accounting for around 55 per cent of the total output. The value of exports for FY23 was USD 325.44 billion as compared to USD 254.52 billion in FY22, registering a positive growth of 27.86 per cent (source: https://www.ibef.org/exports/services-industry-india#:~:text=During 2022-23, the trade,same period the previous year).

In WTTC’s Economic Impact 2023 report, India’s Travel and Tourism GDP contribution grew by 5.9 per cent. In 2021, the travel & tourism industry’s contribution to the GDP was USD 178 billion; this is expected to reach USD 512 billion by 2028. By 2029, it is expected to account for about 53 million jobs. In India, the industry’s direct contribution to the GDP.

As we navigate the complexities of a rapidly evolving global economy, understanding the implications of tax rates on the services sector including travel and tourism is crucial for sustainable growth as it provides employment to millions contributing significantly to the country’s GDP.

If we look into the data released by the Ministry of Tourism and Press Information Bureau, India welcomed more than 9 million foreign tourists, marking an impressive growth of 43.5 per cent in 2023 FTAs contributed Foreign Exchange Earnings (FEEs) of INR 2.3 lakh crores (provisional estimates), a growth of around 65 per cent in the same period compared to INR 1.39 lakh crores in 2022.

This highlights how steadily India is becoming a global travel destination. Apart from international tourism the pivotal growth of domestic tourism is driving the development of the tourism sector in India. The country recorded 2509.63 million domestic travel visits.

This growth can also be attributed to the Indian Government’s initiatives including Dekho Apna Desh, Ayush Visa, Swadesh Darshan 2.0 etc. The fundamental objective of these initiatives was to increase awareness of tourist spots and products within India.

Travel and Tourism and Tax regime

Tax rates play a pivotal role in shaping the growth of the travel and tourism industry. While a competitive tax environment can stimulate investment and encourage growth, high tax rates can stifle potential.

The Ministry of Tourism has taken up the GST taxation slabs with the Ministry of Finance, Government of India, from time to time, as a result of which the following changes have been effected in GST rate slabs with respect to tourism products and services:

GST (Goods and Services Tax) Council announced a cut in the tax rate on hotel room tariffs, a move aimed at giving a boost to the hospitality sector. The GST rate on hotel rooms with tariffs of up to INR 7,500 per night has been cut to 12 per cent from the existing 18 per cent. Similarly, the tax on room tariff of above INR 7,500 has been slashed to 18 per cent from the existing 28 per cent. There will be no GST on room tariffs of below INR 1,000 per night.

As soon as the Goods and services tax was rolled out in 2017, it had a mixed impact on the industry. On the positive side, it has streamlined the tax process creating a level playing field for businesses in the tourism sector which has increased operational efficiency and made it easier and more accessible for companies to conduct their businesses. It has also increased the government revenue which will help in investing in essential infrastructure services for tourists.

Balancing Revenue and Long-Term Growth for Tourism-Dependent Economies

Ours is a Tourism-dependent economy, where the travel sector contributes a substantial share of GDP. Therefore, we must navigate the delicate balance between generating immediate tax revenue and ensuring long-term growth. High taxes may boost government revenues in the short term but can undermine the sector’s growth by discouraging tourists from visiting.

The COVID-19 pandemic highlighted the importance of tax policy flexibility. To revive their ailing tourism sectors, countries like Italy and France implemented temporary VAT cuts for hotels and restaurants. Other nations eliminated tourist taxes altogether, offering financial relief to struggling businesses. These measures underscore the importance of responsive tax policies that adapt to industry cycles, global disruptions, and economic crises.

However, long-term tax relief must be carefully balanced to prevent fiscal deficits.

Sustainable Tax Policy for the Future

As the travel and tourism industry evolves, so must tax policies. Governments need to develop tax frameworks that are both efficient and aligned with the global nature of the industry. Increasingly, countries are exploring “tourism green taxes” to reduce the environmental impact of travel. These taxes, when properly designed, can promote eco-friendly travel options while simultaneously supporting environmental conservation efforts.

Way Forward

One may think that lowering taxes might be a quick fix to boost the sector but it cannot act as a panacea. The most effective way to support the sector is to stimulate it at an optimal tax rate which will benefit both the industry and the government.

While the government through its National Tourism Policy seeks to increase the sector’s contribution to GDP, it needs to also balance the revenue generated from the tax rates and reinvest it into building infrastructure and connectivity. The government and the services sector need to work hand in hand to foster tourism growth.

(Dr Abhay Sinha is the director general of Services Export Promotion Council (SEPC), an export promotion council set up by the Ministry of Commerce and Industry).

The views expressed in this article are those of the author and do not necessarily represent those of ETTRAVELWORLD.COM