How GST Will impact the Hotel and Travel Industry in India

The hotel industry is one of the fastest growing domains in India, and, together with the travel segment, it was valued at $136.2 billion by the end of 2016. The implementation of Goods and Services Tax (GST) will help the hotel and travel industry largely by bringing down costs for customers, consolidating the multiple taxes into a single tax value and decreasing transaction costs for concerned business owners. However, certain challenges accompany these outcomes as well.

A look at the conditions pre- and post-GST

Similar to other industries in India, there were multiple taxes applicable to hotel industry. These were chiefly in the form of value added tax (VAT), luxury tax and service tax. For a hotel, if a room’s tariff exceeded Rs 1000, the service tax liability was 15%. With an abatement of 40% allowed on the tariff value, the actual rate of service tax was brought down to 9%. The VAT that ranged between 12% and 14.5%, as well as the luxury tax, was applied over and above this.

The GST impact on hotels and travel industry 

Under the GST regime, the hospitality domain gets the advantage of standardised and uniform tax rates. The utilisation of input tax credit (ITC) has also become simpler and better. Complimentary food (such as offer of breakfast with room) that was separately taxed under VAT will be taxed as a bundled service under the GST system.

As a positive effect of GST for hotels, the end cost to be paid by the final consumers will decrease, which will help to attract more tourists and push up the growth of businesses in this industry. Conversely, it will also increase the revenue collection of the government.

The tax rates under GST for hotel industry have been set as:

Room Tariff Per Day GST Rate
Less than Rs 1000 NIL
Rs 1000 – 2499 12%
Rs 2500 – 7499 18%
More than Rs 7500 28%

Most hotels in India follow a dynamic pricing policy, where they decide upon the tariffs manually as per the number of tourists expected in a certain season. The tariff, therefore, keeps changing according to the demand and supply forces. Since the GST rates vary for different tariff levels, hotels have to ensure that their billing software also changes the tax rate as per the room tariff throughout the distribution channels comprising travel agencies and online aggregators. Making such changes in the billing systems could take some time.

Positive aspects of GST

The Goods and Services Tax has brought some relief for the hospitality industry through:

Ease of administration 

With the implementation of GST, the multiple state and central taxes levied on the tariffs of hotels have been done away with. This has helped to trim down the burden of different procedures of tax application and has resulted in better streamlining of the entire process.
Less confusion for customers

Tourists staying in hotels and availing some special services were largely confused by the multiplicity of taxes in their bills. For most of them, it was difficult to understand the difference between VAT, service tax and luxury tax. Under the GST system, they will see only one consolidated tax on their invoice, which will give them a clearer picture of what they are paying in tariffs and what is the tax charged on them.

Enhanced quality of service 

Many tourists and hotel guests have had the cumbersome experience of waiting in the hotel lobby while their bill was being prepared. It often took longer to add the different tax components and prepare the final version of the bill to be paid by the customer. With GST, the managers have just one tax to calculate and that makes the checking-out process from hotels quicker and simpler.

Ease of using input tax credit

Entities in the hotel and travel industry can now easily claim and get input tax credit. They are entitled to get full ITC (input tax credit) on the inputs that they add. Due to the division of revenue between the centre and state governments, the multiple taxes paid before GST regime on inputs – like cleaning supplies, uncooked edibles for meals – could not be smoothly adjusted against the output. The calculation of ITC will be easier in the GST system.

Negative aspects of GST

The GST for travel industry and hotels also comes with its share of adverse impacts. With a taxation rate of 28%, the hotels charging tariffs over Rs 7500 are worst hit, as their final prices for customers will increase significantly.

Looking at the bigger picture, GST can hit the inflow of foreign tourists to India. Other Asian countries such as Japan and Singapore impose tax rates as low as 8% and 7% on their hotel and travel industry. This can become a big factor in making them more preferred tourist locations as compared to India.

Capital Float looks at GST for hotels and tourism as a mixture of simpler, smoother rules and seemingly higher costs & compliance. The trade associations of hotels and restaurants have been protesting for a lower tax rate of 5%, but it starts at 18% for a majority of them. The value of tourism industry in India is projected to grow by up to $280.5 billion in the next 10 years. How well the positive aspects of GST outweigh its negative effects is yet to be seen. Meanwhile, despite the challenges, the credit support for the development of new hotels and restaurants by an NBFC like Capital Float will continue to be consistent.

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Budget 2017: Giving SMEs a stronger footing

SMEs play a crucial role in the economic development of India. They contribute to 45% of the industrial output, 40% of the exports and 42% of the employment in the country. Although these enterprises are highly significant to the economy, they are regularly challenged by policies, laws and processes In recognition of this, the Union Budget 2017 gave start-ups and SMEs a lot to cheer about.

Increasing Financial Viability with a Lower Tax Burden

Finance Minister Arun Jaitley announced a reduction in corporate tax from 30% to 25% for SMEs with an annual turnover of less than ₹50 crores. Moreover, the presumptive tax rate for SMEs with an annual turnover of up to ₹2 crores has been lowered from 8% to 6%. Both these measures would increase the bottom-line of SMEs. These enterprises work on low profits, and their survival is often threatened by even minor fluctuations in the business. The enhanced financial viability would increase the survival rate of SMEs.

At the same time, Budget 2017 has tried to align with the broader objective of increased digitalization. The proposed reduction in presumptive tax is applicable only for a firm’s gross receipts that are received via digital transactions. Also, no cash transaction above ₹3 lakhs would be permitted going forward. Both these measures have been designed to increase transparency and widen the tax base through digitalization.

Much Needed Breaks

Start-ups need maximum support during their initial years. From the next fiscal year, start-ups would have to pay taxes for only three out of seven years, up from last year’s exemption limit of five years, if they recorded profits. This is a great opportunity for start-ups and the economy. While a huge percentage of start-ups fail, these enterprises are responsible for introducing the most innovative products and services. The tax break announced by the Finance Minister would give start-ups a better fighting chance of survival and encourage more innovative ideas to be executed well.

Loans, Financing & Funding

The Finance Minister doubled the lending target to ₹2.44 lakh crores for the next fiscal year, making more credit available to small businesses to finance their working capital needs. Prime Minister Narendra Modi had already announced, on December 31, an increase in government credit guarantees for SMEs from ₹1 crore to ₹2 crores.

The FIPB (Foreign Investment Promotion Board) is to be abolished in the upcoming fiscal year. This would significantly liberalize policy related to FDI (Foreign Direct Investment). This is expected to boost retail and ecommerce in the country. Mr. Jaitley mentioned that further FDI relaxations were under consideration.

Most traditional banks are unwilling to give loans to SMEs due to the fear of defaults. Tax concession on provisions for non-performing assets (NPAs) and capital infusion of ₹10,000 crores for state-owned lenders would make loans more accessible to SMEs.

To encourage more investments into start-ups, the condition of continuous holding of 51% voting rights has been relaxed for carrying forward of losses by start-ups, provided the founder remains invested in the business.

Building on Digital India

While saying the almost 125 lakh people had adopted the BHIM digital payment app, the Finance Minister announced two new schemes – cashback for merchants and referral bonus for individuals.

Aadhaar Pay, the merchant version of the Aadhaar Enabled Payment System (AEPS), is to be launched shortly. This app would enable consumers to make payments without using cards, e-wallets or even mobile phones, since the merchant’s device would be linked to an Aadhaar biometric reader. More than a billion people in India already have Aadhaar cards, and this system would make most financial transactions simple, fast and traceable. It would be a boon for raising loans, enabling fintech lenders to link repayment to payments received by the SME.

The government would be targeting ₹2500 crore digital transactions in FY18 through BHIM, Aadhaar Pay, IMPS and debit cards. The Finance Minister indicated that banks would have to introduce 10 lakh new point-of-sale (PoS) terminals by March and 20 lakh Aadhaar-based PoS terminals by September, allowing more digital transactions, which would enhance financial inclusion and transparency.

Infrastructure

For the upcoming fiscal year, the Finance Minister announced a step-up in the total allocation for infrastructure development to an all-time high of ₹3.96 lakh crores, including increased allocations for railways, road and shipping. Infrastructural development eases a huge bottleneck faced by SMEs in transporting their goods to other regions in a timely and cost-effective manner. Better infrastructure would give confidence to SMEs to expand their markets farther and reduce wastage and spoilage during transportation.

Moreover, the roll out of GST (Goods and Services Tax), which the Finance Minister indicated was tracking as planned, would further increase the ease of doing business in other states.

An allocation of ₹10,000 crores towards the Bharat Net project was announced. This would increase access to high-speed broadband across India, facilitating communication and allowing SMEs to reach out to clients located in various corners of the country in a cost-efficient way. The geographic scale achieved will help SMEs to break physical boundaries and leverage bigger opportunities for growth.

The latest Union Budget comes as a respite for start-ups and SMEs. The strengthening of these businesses would play a critical role in India’s transition to becoming an economic superpower.

Oct 24, 2018

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Here is How Unsecured Loans are Different from Secured Loans

Adequate funding is a pre-requisite for any business. Whether a project is at its initial stage or in the development phase, it needs ample financial backing to keep up its growth momentum. However, finding adequate funding can be a challenging process despite the market now offering a wide range of alternatives to traditional sources of finance.

In their search for funding options, start-ups and small businesses often stand at crossroads where they must choose between secured and unsecured loans. On the surface, both look “equally attractive” with their respective advantages. Borrowers are frequently perplexed as to which should be their final choice.

It is therefore important to delve more deeply into these two broad categories of loans and compare their costs with the benefits they bring. Businesses must also be aware of their own financial situation to understand clearly which loan option they will be eligible for.

Let us first understand the basic concepts of secured and unsecured business loans in India.

Secured Loan

A secured loan is always backed by assets. While applying for such a loan, the business must own something of measurable financial value, which can be offered as collateral to the lending institution. This could be an immovable property (a plot of land with or without construction), gold, a valuable investment portfolio, or any other asset that can be liquidated. Businesses can also extend their machinery, raw material or inventory stock as collateral.

The collateral has to be pledged to the lending institution. This implies that the lender will hold the title/deed to the collateral until the loan is fully paid off. However, the borrower retains the ownership of the asset and will continue to enjoy benefits accruing from it.

If the borrower fails to pay off the loan in the stipulated time, the lending institution has the right to take over the possession of the collateral and sell it to recover the outstanding debt amount. Typically, with secured loans, the end use of funds borrowed is pre-determined.

Advantages of secured loans

Borrowers are often lured to secured loans in the hope that they will be able to procure a larger loan amount than what unsecured loans can offer. The longer period available to pay back the borrowed sum is also a perceived advantage.

Another apparent benefit of these loans is the lower interest rate charged on them. This is based on the rationale of lesser risk involved, thanks to the collateral that can be sold off by the lender in case of payment defaults.

THE CAUTION – What must also be remembered is that some secured loans can have very high interest rates. There are financial agencies that charge the highest legal interest rate for business loans despite taking collateral from the borrower. Reading the fine print carefully is always recommended. In some cases, a low interest rate can also be a promotional or limited period offer that may be withdrawn after a few months.

In addition to non-banking financial companies (NBFCs), nationalised and private banks also offer secured loans to businesses, but the banking penetration in India is still low. This prevents several small and medium enterprises (SMEs) from obtaining a secured loan at a reasonable interest rate.

Another common disadvantage of secured loans is that the process of getting approval is longer and calls for more paperwork than an unsecured loan.

This brings us to the second business loan category.

Unsecured Loans

An unsecured loan is not backed by any collateral. It allows the borrower to get funds without having to offer any asset as guarantee to the lending institution. Generally, unsecured business loans come with a fixed term and fixed rate of interest.

Unsecured loans are offered based on the credit worthiness of the borrower. For an enterprise, the eligibility can be gauged in terms of years in business, its annual turnover and the primary location (city) from which it operates.

The tenure of these loans is often shorter than the long-term loans granted by banks. Most nationalised and private banks approve loans for SMEs with a payback tenure of not less than one year. NBFCs can offer immediate loans for shorter periods. At Capital Float, unsecured small business loans are offered for a tenure of one to 12 months. This gives the borrower the advantage of securing quick funds for sudden needs. Once the project begins to reap returns, the business can pay off the loan and thus avoid paying interest for prolonged terms.

Advantages of unsecured loans

When a business requires only a small amount, an unsecured loan is a better alternative than a secured one, especially if the business does not want to expose its financial assets to the risk of repossession. Also, those companies that do not possess sufficiently valued assets for the amount they require can find easy access to working capital finance with unsecured business loans.

Such loans also act as a good source of funds for companies that are already trading. Since the loan is unsecured, the lenders decide upon its amount by simply assessing the trading position of the business. Background checks are performed on credit history, cash flow position, cash reserves and balance sheet.

Unsecured business loans are quicker to obtain than secured loans. We provide funds to our clients within 3 days once they submit the necessary documents and clear the eligibility criteria. As against this, private banks take more than two weeks in forwarding the grant, while public sector unit banks can take 4-6 weeks for the same.

If your business needs immediate financial support and you are hesitant to offer any collateral to the lender, unsecured business credit will work for your best interests. By choosing Capital Float as your trusted finance partner, you are assured of a quick digital process to submit your application. The entire loan disbursal process is completed in three simple steps, given below:

  • Upload the minimum required documents on our website
  • Receive approval in minutes if your paperwork makes the business eligible for loan
  • Get the funds within next 72 hours

Do not let the long-drawn processes of conventional funding delay the pace of your venture’s development. In the digital age, unsecured corporate loans can conveniently help you accelerate your business growth.

Oct 24, 2018

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Tax Computation – 2 regimes

India’s Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman, on February 1, 2020 tabled the Union Budget for the FY 2020-21 in the Lok Sabha. She announced a new income tax regime in addition to the existing one, to provide relief to individual taxpayers. 

However, this new regime is optional and the taxpayers can choose between the old and the new, basis their suitability. The new regime has foregone certain deductions and exemptions. The tax rates have been reduced, but taxpayers will have to forego exemptions when choosing the new tax regime.

Let us take a look at the tax rates of individuals whose age is less than 60 years under both the regimes:

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-5 lakhs5%5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

From the above table, it is evident that the tax rates are lower in the new regime than the old regime. But, there is a list of exemptions and deductions that has to be conceded by the taxpayers. This list includes but is not limited to the following:

i) Leave Travel Allowance (LTA)

ii) Conveyance

iii) House Rent Allowance (HRA)

iv) Uniform Allowance

v) Helper allowance

vi) Professional tax

vii) Standard deduction

viii) Other special allowances [Section 10(14)]

ix) Interest on housing loan (Section 24) on self occupied property

x) Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJA)

Savings calculation based on income

PARTICULARSOld Tax Regime(Rs.)
Gross Income15,00,000
Less: Deductions- 
      U/S 80C (Investment in PPF)1,50,000
      U/S 80D (Medical Insurance – Self, spouse, children)25,000
      U/S 80TTA (Interest Income from Savings account on a bank)10,000
Taxable Income13,15,000

TAX ON TAXABLE INCOME (OLD TAX SLAB)(Rs.)(Rs.)
At normal rate, on the income of Rs. 13,15,000:  
Up to 2.5 lakhsNil 
2.5-5 lakhs @5%12,500 
5-7.5 lakhs @20%50,000 
7.5-10 lakhs @20%50,000 
10-12.5 lakhs @30%75,000
12.5-13.15 lakhs @30%19,500 
Total 2,07,000
Add: Cess @4% on Rs. 2,07,000 8,280
Tax Liability 2,15,280

From the above illustration, it is evident that taxpayers can reduce their taxable income by investing in tax saving instruments such as Provident Fund, Medical Insurance, etc. that appear as deductions under section 80C to 80U of the Income Tax Act, 1961.

PARTICULARSNew Tax Regime (Rs.)
Gross Income15,00,000
Less: DeductionsNil
Taxable Income15,00,000

TAX ON TAXABLE INCOME (NEW TAX SLAB)(Rs.)(Rs.)
At normal rate, on the income of Rs. 15,00,000:  
Up to 2.5 lakhsNil 
2.5-5 lakhs @5%12,500 
5-7.5 lakhs @10%25,000 
7.5-10 lakhs @15%37,500 
10-12.5 lakhs @20%50,000 
12.5-15 lakhs @25%62,500 
Total 1,87,500
Add: Cess @4% on Rs. 1,87,500 7,500
Tax Liability 1,95,000

From the above illustration, having regard to the income level and the deductions being claimed by the taxpayer, it is possible that taxpayers can save money because of the low tax rates of the new regime, however the same needs to be evaluated on a case-to-case basis.

Tax rates under both the regimes for senior citizens

Tax rates for individuals whose age is 60 years or more but less than 80 years (Senior citizens):

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-3 lakhsNil5%
3-5 lakhs5%5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

Tax rates for individuals whose age is 80 years or more (Super senior citizens):

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-5 lakhsNil5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

The Government has offered two types of regimes for tax computations for individuals– the old and the new system. The taxpayers should scrutinize and study both systems before opting for one. They should take into consideration their salaries, expenditures, savings, etc to select the system that is suitable for them. 

Disclaimer: This blog post is based on the provisions of the Finance Act,2020 as passed by the Parliament. Any subsequent notifications have not been factored into this post.

Oct 24, 2018