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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An eminent panel of experts from International Financial Corporation, Stanford GSB and CreditEase curated a report and highlighted Capital Float as one of the 100 companies in the world facilitating Financial Inclusion. Our co-founder, Gaurav Hinduja spoke with Anju Patwardhan, MD of CreditEase China on Capital Float’s business model, strategic direction and technological breakthroughs. Read the full interview below.
1. What inspired you to start your business?
The fact that India had more than 50 million SMEs with no access to formal credit who, despite contributing a staggering 15% to the country’s GDP with a high market share of 40% towards employment, had an unmet credit demand of $ 400 billion. Traditional lending institutions are limited by the constraints of their conventional underwriting models that restrict financing due to the volatility of this sector. This, in turn, pushed SMEs to the informal sector where the high interest rates charged by moneylenders fettered borrowers to a chronic cycle of debt. Capital Float was established with the objective to bridge this gap in the market with innovative and flexible credit products for SMEs, delivered in an efficient and customer-friendly manner.
2. Who is your target user base and what is your mission for this group?
Capital Float aims to service high potential, under-served, SMEs with an annual business turnover ranging from Rs 10 lakhs to Rs 100 crore. Our mission is to provide a seamless borrowing experience using customized finance products that cater to the specific needs of different SME segments. Here, technology plays a crucial role in reducing turnaround times, implementing paperless processes and pioneering predictive lending.
Also, we drive our products and processes to realize the national objective of financial inclusion. A recent example of this is the introduction of the Proprietor Loans product that facilitates business growth for micro-entrepreneurs in India. The product targets the small retailer segment such as mom-n-pop stores, salons, medical stores, mobile phone retailers, small restaurants, etc. who face challenges in obtaining loans for business expansion from traditional lenders owing to a lack of formal credit history and sufficient collateral. Capital Float is the first company in India to introduce a product that finances this segment. Moreover, we’ve disbursed the quickest SME loan in India, for this loan, in under 90 seconds.
We designed the Proprietor Loan app in collaboration with IndiaStack. This simple loan app enables small retail store owners to apply for a loan ranging from Rs. 25,000 to Rs. 5 lakhs without having to leave their store. Benefited by the merits of a completely paperless process, the applicant has to merely provide their AADHAAR number to apply for the loan. The app fetches the relevant data using the number and underwrites the customer in real time. We disburse funds to the applicant’s account within minutes of the application. We achieve scale by partnering with ecosystem leaders, such as Metro Cash and Carry, PayTM, Amazon Business, Payworld, etc. and serving storeowners operating on these platforms.
3. What is the central “friction” that your company is striving to overcome/mitigate, and what is distinctive about your strategy for enhancing financial capacity your user base?
Predominantly, traditional banks and non-banks have employed a conventional approach to underwriting. They have constantly shied away from utilizing data points from public sources such as social media, and those that are available from the Government in the form of Aadhaar and GST information. Capital Float has designed its credit underwriting with the fundamental understanding that every SME is different. Leveraging data points from partners in each industry sector along with conventional data, our rigorous credit underwriting engine processes loan applications and disburses funds in real time.
In terms of enhancing the financial capacity of SMEs, we lead a partner-driven approach. The company has partnered with ecosystems across various verticals such as e-commerce (Amazon, Flipkart, PayTM, eBay, Alibaba, Amazon, etc.), retailers (Storeking, Metro Cash & Carry), PoS payment enablers (Mswipe, Pine Labs, Bijlipay, ICICI Merchant Services), digital remittances (Wirecard, Payworld, Eko) etc. By taking an ecosystem led approach, we are able to maintain a low OPEX and cater to a wide range of SMEs without increasing our sales headcount.
We have the widest portfolio of working capital finance products, ranging from Merchant Cash Advance (loans against card swipes) and Supply Chain Finance (loans against bills receivables) to Unsecured Business Loans (traditional business instalments loans) and Proprietor Finance. We designed a unique credit solution called ‘Pay Later’. By using this product, borrowers can make multiple drawdowns from a predefined credit capacity. Interest is charged on the utilized amount and not the entire credit capacity, and the balance gets restored upon repayment. ‘Pay Later’ can be used to make supplier payments within 24 hours.
A collaboration of partnerships with industry leaders and niche products ensure that we can expand our outreach to a majority of our target base and enhance their financial capacity.
4. How does your business model balance the objectives of (a) providing benefits to your user base and (b) meeting the financial targets of your investors?
The SME sector in India is restricted by technical as well as functional limitations that inhibit their access to formal sources of finance. Most small enterprises simply cannot afford to expend time for the lengthy processes and immense documentation requirements that are mandatory to avail a loan from banks or traditional NBFCs. Presenting sufficiently valuable collateral for the loan amount they require is another barrier that most SMEs can’t overcome. Capital Float has a completely digital loan application process that eliminates the need for borrowers to be physically present at a lending institution’s premises to apply for a loan. The use of unconventional data points further reduces the need for a multitude of documentation for credit underwriting. All our SME-oriented credit products are unsecured in nature, which facilitates easy access to finance for a previously ineligible majority of business owners.
Customer satisfaction is immensely significant to us, which drives our efforts to ensure that we offer the best-in-class user experience to our borrowers. This is made possible through continuous innovation that enables us to adapt quickly to the ever-increasing demands of our core target base. Apart from these, we are willing to venture into unexplored SME avenues that face a significant credit deficit. We have recently launched credit products such as Proprietor Loans, Franchise Finance and School Loans for niche customer segments that have previously received little financial backing from lending entities in India. Our constant product & process innovation to reach out to new audience ensures that we never fall short in fulfilling the financial expectations and reinforcing the continual faith of our investors.
5. To what extent, if at all, are traditional deposit-taking financial institutions potential collaborators for fulfilling your mission?
Being an upcoming technology driven lender, we view traditional banks and non-banks as collaborators, not competitors. Capital Float operates India’s largest digital co-lending model, wherein we co-lend with banks, NBFCs and others. We currently have several banks and NBFCs such as RBL, IDFC, IFMR and Tata Capital participating on the platform. Loans are presented on the platform and offered on a first-come- first serve basis. We co-lend up to 30% of each loan to ensure that we have our skin-in- the-game and risks are mitigated. This model works emphatically well, as participating entities are able to leverage the strengths of the other. Banks and large NBFCs possess immense balance sheets, which when made available on the platform lowers our cost of capital. Meanwhile, banks are able to meet their priority sector lending targets by lending to SMEs via the platform. Our data-driven assessment and speed of processes, backed by a robust digital infrastructure significantly lowers the cost of acquisition for participating entities.
The co-lending model currently contributes to 40% of our AUM. We expect this figure to reach 50% of our AUM by end of this financial year.
6. Stepping away (perhaps) from your own company’s mission, what do you see as the major regulatory or technological breakthroughs needed to take a major next step forward in building global financial capacity?
Digital lending companies have evolved as disruptors in traditional financial markets, with an estimated one third of consumers worldwide using FinTech services. To sustain the efforts of this upcoming sector and extend their outreach to the majority of their target group, opening public sources of funding is a necessity that requires government intervention. In India, public funding initiatives such as MUDRA and SIDBI refinances institutions that lend to MSMEs, but within regulations of their own. As a result, refinancing support fails to cover the high operating cost of the small-ticket, short duration unsecured loans that are provided by FinTech lending institutions.
Creating a sustainable digital infrastructure that facilitates easy transfer and recovery of finance offered by FinTech lenders is the need of the hour. This, when implemented via eNACH, will help the digital ecosystem in achieving faster adoption.
Also, enhanced access to government data is yet another factor that will be a game changer for building global financial capacity. With the introduction of a new indirect taxation regime in the form of GST, India has acquired a verified database of tax compliant businesses that offers significant information to determine the credit worthiness of business loan applicants. If this data can be shared with FinTech lenders and credit rating agencies through a secure API, this will result in increasing lending opportunities to myriad SMEs across the country.
Oct 24, 2018
India’s growth as an economic power in Asia has been consistent in the past one decade. In addition to the contribution of larger corporations and the multinational companies that have forayed here, this economic growth is significantly supported by the small and medium enterprises (SMEs) – a highly resilient and innovative sector that employees more than half of the Indian population.
The SME sector of India holds a huge potential for growth. However, the only challenge that could thwart their evolution is the lack of timely and adequate capital. A majority of the organisations in this sector operate as small entities that may lack the detailed documents or collateral required to procure loans from banks. Some of them are simply reluctant to offer their financial assets as security for the fear of losing them.
Given this lack of funds, small businesses face problems in meeting their operating expenses and are constrained from expanding their operations. Other problems include making payments on debt (owed to any other source of finance) and buying supplies to fulfil their contracts.
A solution against such inadequacies has emerged in the form of FinTech companies that focus on financing small and medium enterprises.
The FinTech revolution has been facilitated by digital technology wherein funds are instantly provided to eligible SMEs after the evaluation of certain documents submitted online by them. As a pioneer in Fintech lending, Capital Float has a 10-minute online application processing system, followed by a three-day disbursal TAT.
The ease of borrowing from online lenders has also raised a question – are these companies a threat to the conventional lending setup established by banks?
Contrary to what is usually perceived, FinTech companies have proved to be active partners for banks and are helping them disburse more loans. They have assisted banks in identifying good customers faster and in disbursing quick credit.
Thanks to the robust growth of the economy in the last few years and the positive outlook for the manufacturing and services sectors, there is sufficient room for growth for both traditional and new age lending institutions.
Although their functioning may differ, lending decisions for both have to be guided by a good knowledge of the customer’s ability to repay the loan. Banks typically lend to individuals or businesses that have high regular income and/or the willingness to offer collateral as security. The collateral must be a financial asset that can be liquidated in case the borrower is unable to pay back. Banks refer to income tax returns, credit bureau scores and operational history of the concerned applicant.
In comparison, and driven by their intent to know their customers better, peer-to-peer lending companies employ non-conventional data sources for underwriting loans to individuals. As these companies are in the private sector, they are not fraught by a levy of formal regulations in evaluating clients for funds. They use multiple data points, including information extracted from new age technology such as big data analytics, to assess creditworthiness. In addition, they offer unsecured loans that do not require applicants to pledge any of their assets. These companies use a streamlined underwriting process along with risk management. Their work is characterised by extensive use of sophisticated technology and lower operating costs.
As the business of FinTech lending grows, banks also acknowledge that their customers today are technology savvy, and they are looking at ways where collaborations with online lenders can help them serve their own customers better. Because of their success in the credit market, FinTech companies have proved that this can be done without operational or regulatory risk to the lender.
Since 2015, the digital lending industry has undergone significant changes, and chief among these is the shift towards a cashless system. The promotion of cashless technologies – digital wallets, Internet banking and mobile-based point of sale – has reshaped the financial sector. Later, demonetisation became a major factor that popularized the concept of online lending.
As a positive development, banks are now looking at online lenders as partners instead of as competitors in the market. Some banks have made arrangements where they, in return for a small fee, refer customers to p2p lending platforms that provide unsecured loans that not offered by banks. Through such a program, they facilitate loans for businesses that deserve to get funds but cannot procure them from banks due to long-established, inflexible rules.
Some banks are part of programs that let them use a FinTech organisation’s technology to provide small business loans. These loans are retained on the bank’s own books, but the FinTech company’s platform is used to approve and service them. The banks see this as an opportunity to offer a product they generally do not have on their portfolio but (by seeking the support of a peer-to-peer lender), it helps them retain precious client relationships.
Banks have large balance sheets that they can use to provide loans and cater to promising start-ups and SMEs with a consistent growth rate. However, their conventional underwriting practices have deterred them from promoting some SME segments. Conversely, the government has now highlighted SME as a priority sector in the economic development of India. Therefore, the banks have to meet their new business lending targets without incurring huge costs.
The credit gap in the market can be closed with a fruitful relationship between banks and peer-to-peer lending companies. Capital Float has custom-made loan products and fine-tuned technology to help banks achieve their goals. It can help them reach out to businesses in need, and banks can then use their financial strength to service them.
New age financial technology has transformed the way consumers, and businesses, borrow and spend money. The aim of FinTech lending is to enhance the convenience of financial services and bridge the gap between demand and supply of small business loans. To help their customers, banks can effectively work alongside peer-to-peer lenders instead of competing with them.
Oct 24, 2018
With the Goods and Services Tax (GST) set to roll out on July 01, 2017, expectations and anxieties are high with individual taxpayers and businesses trying to gear up for a brand new tax regime.
Components of GST
To be able to make the most of the new indirect taxation law, taxpayers need to understand its components well.
The GST Council which was set up by the Central Government to execute GST implementation, has proposed a new tax framework-structure for GST.
First and foremost, GST represents a “One Nation, One Tax” outlook, which is necessary to do away with multi-tax regimes that lead to inefficiencies such as cascading taxes, levy of excise at the point of manufacturing and lack of uniformity in tax levies. Currently, Goods and Services are taxed under various disparate tax categories such as Excise Duty, VAT or Central Sales Tax, Service Tax (in the case of services dispensed) and Customs Duty (for imports). Some of these taxes are levied by the Central government, and others by the state government. A unified approach— GST— will help do away with these complexities by enabling a single tax regime right from manufacturer to consumer. It is important to know that GST is a destination-based tax i.e., the tax is credited to the taxation authority whose jurisdiction prevails at the place of consumption (also called the place of supply). Moreover, GST will be levied on value-addition, by allowing for input tax credit at each stage of the transaction chain.
GST will have four slabs of indirect taxation: 5%, 12%, 18% and 28%, with goods and services attracting any of these slab percentages depending on various factors such as being a luxury good/service. The current indirect tax structure will give way to a Dual GST model, with the Centre and States simultaneously levying GST on a common tax base, as follows:
- Central GST Bill (CGST): For intra-state transactions related to supply of goods and/or services, levied by the Centre.
- State or Union Territory GST Bill (SGST or UTGST): For the supply of goods and/or services in the States and Union Territories, levied by the States/Union Territories.
- Integrated GST Bill (IGST): For inter-state transactions and imports related to supply of goods and/or services, carried out by the Centre.
Under this structure, the CGST and SGST/UTGST will be levied simultaneously on the same price or value. Here is an example of how this will happen: Consider a steel supplier who manufactures in Jharkhand and supplies steel to another company within Jharkhand. Let us assume the rate of CGST to be 10% and SGST to be 7% and the selling price of the steel to be Rs. 100. The supplier will charge the client a CGST of Rs 10 and SGST of Rs 7. The supplier needs to deposit Rs 10 in his Centre taxation account, and Rs. 7 in the State taxation account. Due to input credit facility, the supplier has the option of setting off the total payment (Rs 17) against the tax he paid on his purchases or inputs. However, these credit values cannot be mixed—for CGST-setoffs he can utilize only the CGST credit; for SGST-setoffs he can utilize only SGST credit.
A Dual-GST is particularly suitable for the Indian economy because in India both the Centre and States are assigned the duty of levying and collecting taxes. So far, the Constitution clearly demarcated the tax levying and collection duties of the Centre and State, with the Centre responsible for taxing the manufacture of goods, and the State responsible for taxing the sale of goods. For services, only the Centre was allowed to levy Service Tax. To override this segregation of power, and enable the smooth implementation of GST, a Constitutional amendment (Constitution Act, 2016) was made so as to simultaneously empower the Centre and the States to levy and collect this tax. With this amendment, the Dual GST regime will now align well with the fiscal federal protocols of India.
Taxes subsumed under GST
The following are the disparate taxes (levied by the Centre and States) which will be subsumed under the new dual-GST regime.
(A) Taxes currently levied and collected by the Centre:
- Central Excise Duty
- Duties of Excise (Medicinal and Toilet Preparations)
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Excise (Textiles and Textile Products)
- Additional Duties of Customs (commonly known as CVD)
- Special Additional Duty of Customs (SAD)
- Service Tax
- Central Surcharges and Cesses so far as they relate to supply of goods and services
(B) Taxes currently levied and collected by the States:
- State VAT
- Central Sales Tax
- Luxury Tax
- Entry Tax (all forms)
- Entertainment and Amusement Tax (except when levied by the local bodies)
- Taxes on advertisements
- Purchase Tax
- Taxes on lotteries, betting and gambling
- State Surcharges and Cesses so far as they relate to supply of goods and services
The taxes to be subsumed were decided after intense debate and consideration of some core principles that were in line with the GST ethos. Each tax was first examined to ensure it qualified for indirect taxation and was related to the supply of goods or services. Moreover, a tax which was to be subsumed needed to be part of the transaction chain right from imports through manufacturing to the provision of services and the consumption of goods/services. Another important criteria to allow a tax to be subsumed was that the subsumation should lead to free flow of tax credit at Intra- and inter-State levels. Also, the revenue considerations of both the Centre and the State were taken into perspective while arriving at the final list of subsumed taxes.
Clearly, the change is huge, and the sooner consumers and businesses get familiar with the implications on Term finances, the better they will be equipped to benefit from the new GST reforms.
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Oct 24, 2018