India’s Travel Tax Rules Keep Changing — and It’s Hurting Domestic Companies

In the past five months in India, there have been four announcements from the government regarding taxes for international tour packages — each completely different, none clearly stated.

It’s wreaking havoc on India’s travel industry as the country is emerging as a major source of outbound travel.

Consider:

February 2023: The Indian government announces that on July 1 it would be raising the tax collected for international tour packages bought from an Indian tour operator to 20% from the earlier 5%.

That means if an Indian traveler books a foreign tour package to Italy for Rs 200,000 ($2,500) through an Indian travel agent or an online travel agency in the country, there would be a tax of Rs 40,000 ($500).

May 2023: The finance ministry announces that if one chooses to pay for a tour package offered by international websites using an international debit or credit card, no tax would be imposed as long as the payments remain below Rs 700,00 ($8,500).

June 2023: Overseas transactions through international credit cards will not be subjected to tax for now, except for overseas tour program packages, which would continue to incur 5% tax. This is valid for all modes of payment regardless of the purpose.

June 2023: The government “suspends” its tax decision days before July 1 and says new rates would kick in from October 1.

The flip-flops have left the industry frustrated and confused. Skift spoke to several India-based travel companies to better understand the concern of the new tax policy.

Mahendra Vakharia, the managing director of Pathfinders Holidays, described the frequent changes as “amateurish” and “poorly executed.”

The complexity of the travel and tour industry, with its various booking and payment modes, makes it difficult to impose a blanket 20% tax, said Vakharia.

Isha Goyal, CEO of STIC Travel Group, considers these policy changes an inconvenience for small and medium-sized travel companies trying to expand their outbound travel business.

The ambiguity in tax policies has made it challenging for businesses to effectively plan their operations, according to Rikant Pittie, co-founder of EaseMyTrip. However, Pittie is relieved that with every new development, the policies are being relaxed.

How Does This Render Indian Companies Non-Competitive?

It’s not just about the inconvenience: The taxes put Indian travel companies at a disadvantage to international operators.

The proposed increased tax on overseas travel deters holiday-goers, family visitors, and entrepreneurs from traveling. For individuals relying on monthly income, the 20% tax credit, which they can later claim in their tax return given at the end of the year, does little to alleviate the immediate cash flow challenges.

Furthermore, the unequal imposition of taxes affects Indian travel companies in another way. By implementing the tax for Indian tour operators, travel agents and overseas credit card payments, the policy encourages travelers to book with international companies.

“Such a regressive step goes against the Make In India policy,” said Vakharia, a reference to the prime minister’s Make In India mantra. “It seems illogical to impose a 20% tax on international travel when luxury cars attract only a 1% tax.”

Goyal said it not only hurts small local entrepreneurs and businesses, but also leads to potential revenue losses as overseas bookings increase through international credit cards and prepaid foreign exchange cards.

Rohan Mittal, chief financial officer of Yatra Online, thinks the government should ensure fair competition between Indian travel companies and international aggregators by bringing foreign companies under the same tax rules.

Vishal Suri, the managing director of SOTC Travel, supports this idea and suggests implementing revised credit card guidelines to ensure fairness for India-based travel companies.

Goyal further emphasized the need for a consistent ruling applicable to all payment channels and modes, rather than staggering or selectively defining inclusions and exclusions.

The TCS imposition has caused mixed reactions within the industry. Some smaller leisure-focused agents are shifting their focus to domestic and regional packages to mitigate risks.

However, larger group operators remain confident in the demand for overseas travel, believing that the India outbound growth story will continue to thrive despite the challenges posed by the international travel tax.