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Come GST, Which Services Will Burn A Bigger Hole In Your Pocket?

Restaurant visits will get cheaper while staying at luxury hotels will get expensive.



A worker makes finishing touches to a wallet at a leather workshop in the Dharavi slum area of Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
A worker makes finishing touches to a wallet at a leather workshop in the Dharavi slum area of Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

The Goods and Service Tax (GST) rates on services such as telecom, hospitality and cinema came as a surprise to the industry players.

While the 18 percent tax rate on banking and financial services was largely expected, the same tax incidence on the telecom industry was met with disappointment. The biggest pushback was seen from players in luxury hotel services which will bear the highest tax incidence of 28 percent under the new indirect tax regime.

This was an opportunity for the government to simplify the service tax rates, said Bipin Sapra, a tax partner for EY India to BloombergQuint. “There will definitely be some transaction issues because of intricacies of the rates announced. Even the 15 percent to 18 percent jump for sectors like telecom will be a challenge initially,” he added.

Telecom Services: Prepaid To Get Expensive

GST on telecom services has been fixed at 18 percent compared to 15 percent as of now. The industry was expecting the rate to fall under the 12 percent bracket, said Sapra, adding that the higher tax rate will affect pricing. Ratings agency Fitch Ratings concurred, saying pre-paid services will be particularly impacted in the near term.

There could be a short-term disruption in the telecom sector due to increase in rates. Prepaid usage might be hit temporarily. However, after some time things will normalise.
Nitin Soni, Director-Asian Corporates, Fitch Ratings

Sanjay Kapur, the former chief executive officer of Bharti Airtel Ltd., told BloombergQuint that the Council had missed a perfect opportunity to treat telecom as an essential service and bring the rate down below 12 percent.

“On one side the government is setting up an inter-ministerial committee for the profitability of the sector and on the other side you’re increasing rates,” he added.

The Cellular Operators Association of India had submitted to the government that any rate beyond the existing 15 percent will make telecom services more expensive for the consumer, Rajan Mathews, director general of COAI said in a media statement.

It will augment the existing burden of the industry further. This is also likely slowdown the planned rollout of infrastructure across the country and will have an impact on flagship govt initiatives like Digital India, Cashless India and others.
Rajan Mathews, Director General, COAI

Hospitality: Yay For Restaurants, Nay For Luxury Hotels

Staying in luxury hotels will get more expensive but eating out in a standalone alcohol-serving restaurant will get marginally cheaper, according to EY India’s tax consultant Utkarsh Sanghvi. According to him, the tax incidence on luxury hotels is currently at 20-21 percent, so a jump to 28 percent will drive room rentals higher.

“Overall, it’s going to pinch hotels,” Sanghvi added.

The tax impact is huge, a spokesperson of JW Marriott told BloombergQuint. “This will be an additional burden on the customer.”

Come GST, Which Services Will Burn A Bigger Hole In Your Pocket?

The new rates, however, are a positive for budget hotels. “A lower tax rate for budget hotels will ensure that the industry's quality upgrade continues while delivering standardised accommodation to millions of middle-class travellers,”said Ritesh Agarwal, founder of Oyo. India’s largest budget room providing startup plans to pass on the benefits to its consumers, Agarwal added.

Restaurants too will fare better under the new indirect tax regime. The current incidence of tax on restaurants which do not serve alcohol is 13-14 percent. That has been brought under the 12 percent slab. Restaurants that serve alcohol will come under the 18 percent slab, lower than the current 20 percent, said Sanghvi.

However, restaurants in luxury hotels will be taxed at 28 percent, the same rate that luxury hotels face.

Transport: Travelling Will Be Cheaper

Tax incidence on transportation services will fall by a percent or so under GST, Revenue Secretary Hasmukh Adhia told reporters. The GST pegged a the GST rate on transport services, including railway and air transport, at 5 percent.

It has been awarded the lowest tax slab since fuel, the sector's primary input, has been kept out of the GST spectrum. Once petrol comes under GST's ambit, the tax rate on transport services will increase and can go up all the way to 18 percent, Adhia added. However, input tax credit can then be availed.

Business class air travel will be taxed at 12 percent, the revenue secretary added, while the rate for economy class travel has been pegged at 5 percent.

Car rental services such as Ola and Uber will fall under the 5 percent slab, Jaitley said in his media briefing after the GST Council meeting. This is marginally lower than the current 6 percent tax on the services, said Divyesh Lapsiwala, a tax consultant for EY India.

Welcoming the Council’s decision, Uber said, “By ensuring that the new rate structure is not inflationary, the government has demonstrated its pro-consumer, pro-business stance.”

Come GST, Which Services Will Burn A Bigger Hole In Your Pocket?

Banking And Financial Services: Neutral Impact

The 18 percent GST rate on banking and financial services was largely in line with industry expectations. In fact, the tax incidence will eventually be much lower than the headline number, said Kerala Finance Minister Thomas Isaac.

The sector is currently taxed at 15 percent, Lakshmi Vilas bank's Chief Financial Officer NS Venkatesh told BloombergQuint on the phone, adding that the new rate will not affect the lender’s fee income. “We believe whosoever is paying that (the 18 percent tax rate) can use input tax credit to offset (the higher rate),” Venkatesh said.

The net impact will be neutral as the "increase of 3 percent will likely to be passed on to customers, explained Baskar Babu, chief executive officer of Suryoday Small Finance Bank. The sector does not usually absorb any of these costs, agreed Siddharth Purohit, a senior research analyst at Angel Broking.

It is highly likely that it will be passed on. Forex and other components of other income for banks cannot be related to service tax. So while there could be some incremental cost on the business front, it is highly likely the sector will be able to pass it on.
Siddharth Purohit, Senior Research Analyst, Angel Broking

The country largest public sector lender State Bank of India said the necessary preparation to migrate to the new regime is still underway but hopes to be able to make the transition in a month.

Come GST, Which Services Will Burn A Bigger Hole In Your Pocket?

E-Commerce

Ordering clothes, shoes and accessories online will get marginally expensive as the Council announced a 1 percent rate on companies such as Flipkart and Amazon. Currently, online transaction are non-taxable.

BloombergQuint had earlier reported that the Centre and states would each levy a 0.5 percent tax on e-commerce services. Together it adds up to one percent.

According to BMR Associates’ Rajeev Dimri, this will add to the compliance burden of businesses. “The concept of tax collected at source (TCS) has been introduced with an intent to check tax evasion by etailers. However, the data shared by the e-commerce operators should in itself serve well for checking tax evasion on the outward supply by the etailers,” he said.

Devesh Rai, chief executive officer of online wholesale marketplace Wydr concurs.

In the earlier regime, TDS used to serve the purpose of traceability, but with GST, traceability is in-built to the system. It does however, for e-commerce startups, further increase complexity in terms of execution and operations, along with adding a cost to business.
Devesh Rai, CEO, Wydr

The All India Online Vendors Association however, welcomed the government’s decision, saying this will “keep a check and balance on the marketplaces and also wipe out tax evading sellers”.

Movie Tickets Will Cost You More

Watching a movie will be far more expensive under the GST regime as the tax incidence will increase from the 8-10 percent entertainment tax that the industry currently has to pay, said EY India’s Sanghvi. The Council fixed the tax rate on cinema halls along with gambling and race-club betting.

“We are disappointed at being taxed at 28 percent . Two billion Indians watch cinema every year and we are certainly not in the same category as betting and five star hotels,” said Nitin Sood, chief financial officer of PVR. 

Sood said he was hoping for a standard rate of 18 percent, allowing him to pass on the benefits to consumers, he added.

Indian cultural events have been exempt from taxes under the GST regime. However, service tax will be levied on all other cultural events, including movie tickets, if tickets are priced at more than Rs 250.

Works Contracts: A Positive

Works contract - a contract for supply of both goods and services will be taxed at 12 percent from the current 15 percent.

“A 12 percent rate for works contracts, with full input credit, is an encouraging development as it would be a simpler tax system and should reduce the cash component of the economy,” Pratik Jain, partner and leader of indirect tax at PwC said in an emailed statement.

This should actually contribute to lowering the rates for greater volumes in housing, according to Rajeev Talwar, chief executive officer of DLF.

The works contract rate is a beneficial rate because it was under the ambit of service tax earlier (15%). The total contribution in a works contract should not be more than 10-12 percent so this leaves plenty of room for other taxes to come in.
Rajeev Talwar, CEO, DLF

The lower tax rate will also counter inflationary pressures in the sector, said JC Sharma, vice chairman and managing director of Sobha Ltd.