Reimbursement of 2019-20 Services Exports from India Scheme (SEIS) scrip was probably the single largest issue raised most during the pandemic by country’s inbound trade as well as others in the tourism industry, like hotels, who benefited from the scheme. It took the government over a year to finally give the nod on the SEIS reimbursement, albeit at a reduced 5% (It was 7% in 2018-19) rate. Along with the inbound tourism industry stakeholders and their representative body Indian Association of Tour Operators (IATO), Service Exports Promotion Council (SEPC) also played a key role in highlighting inbound tourism industry’s plight because of the pandemic. However, to the industry’s chagrin, nod for the reimbursement of SEIS for the financial year 2019-20 also came with the news that government doesn’t plan to continue the SEIS scheme any further.
Despite being the single most powerful sector due to its sheer multitude of economic impact within the ‘services’ industries, India’s inbound tourism has for long struggled against the more competitive destinations in the country’s neighbourhood owing to significantly higher taxation regime. Operators in India pay 12% to 18% tax on hotels and 5% on the total package cost without input credit, putting them at a considerable disadvantage against countries in the neighbouring South-East Asia where GST mostly ranges around 5% to 7%. Tour operators have always claimed that the SEIS have factored in their product costing and margins and helped them maintain some price parity vis-a-viz competition. Additionally, it also spurred them to undertake aggressive marketing and promotional tours to their existing as well as potential new source markets.
With SEIS gone, industry is not so sure how to approach an intensely competitive global tourism marketplace. The recently concluded 36th Annual IATO Convention organised a session with SEPC officials that sought to convince tour operators that SEPC has relevance beyond SEIS. Tour operators have to be an SEPC member to claim SEIS scheme.
SEPC is an industry led body set up by Ministry of Commerce & Industry. The trade body promotes and facilitate efforts of services exporters, across sectors, acts as an interface between services industry and policy makers and advises government on trade policies.
Government’s Stand
Speaking at a SEPC Conclave recently, Minister of Commerce & Industry (MoCI), Piyush Goyal made it clear that the services industry must learn to look past SEIS and fend for itself.
“There is a strong thought process in his mind that SEIS should be discontinued, and he has already announced that he is not going to give SEIS for 2021 and 2022. That’s a big jolt for every exporter because whenever we do any export of services these incentives which is going to come from the government is always considered as part of my cost or profit. Now if that is discontinued, there is a disincentive in the sense that my cost would be higher to the buyer or to the stakeholders. That in turn would discourage the stakeholders of the service receivers or the service importers,” says Sunil H. Talati, Chairman, SEPC.
DRESS
The Duty Remission on Export of Services Scheme (DRESS) scheme emerged as the government’s mandate to SEPC to come up with an alternative to SEIS on the basis of RoDTEP, how much it would benefit the MSMEs, the sectors’ multiplier effects in terms of employment generation as well as the capping of the incentives. SEPC engaged Ernst & Young (E&Y) to help develop an alternative incentive scheme that can replicate SEIS in terms of the benefits that services exporters were getting and also look at the concerns which the Ministry had, like, whether SEIS is directly linked to export promotion? Or, if the quantum of SEIS vary, does it really impact export of services?
“DRESS was a scheme where we pointed out that, like RoDTAP, whatever tax are being embedded, and we did a calculation for all the major services which SEPC had given us the mandate to, the value for tour operator services was coming somewhere around 12% to 13% that was being embedded. The other cost which we calculated was in terms of taxes on fuels and other embedded cost like electricity taxes and other taxes,” says, Bipin Sapra, Partner, E&Y.
“What we gave as a recommendation was that if we normalize it over various services, the incentives will come out between four to six or seven per cent and you fix a percentage on the basis of that and you can incentivize the MSMEs by giving them a higher per cent, and the smallest of them an even higher per cent. There should be no capping. Because these services have already been identified as services which will have an impact on the general economy. So, DRESS incentive scheme should have a percentage linked to the tax cost which is getting embedded into the services and that is what we have recommended that on the basis of that the Government should come out with a scheme,” Sapra further added.
Tailwinds
The last few years before the Covid-19 pandemic struck, travel and tourism has consistently contributed a share 14% to 15% in India’s Services exports. Government wants the services exports to reach US $1 trillion, the country to become a US $ 10 trillion GDP by 2030 and services share in the country’s GDP to increase from 55% to 59%. Supporting the tourism sector with right incentives and policy will not only go a long way in achieving these targets but also create huge socio-economic growth through job creation, infrastructure development and stimulating other sectors through tourism’s backward and forward linkages.
Underlying the importance of SEIS or some form of strong incentives mechanism to be put in place, Immediate Past President of IATO and CGC (Central Governing Council) member in SEPC, Pronab Sarkar, said, “Government is asking to increase the exports and help India become a US $5 trillion economy and then US $10 trillion economy. Whereas in tourism we are only getting 11 million tourists and earning about US $ 29 billion in revenue. To increase this to 20 million tourists and US $ 60 billion in revenue within the next 3-4 years, it will not happen without the handholding of the government. If the incentives are not provided, how are we going to compete with the neighbouring countries? We have to beat the competition. We have to add value to our product. It important for the SEPC, DGFT, Ministry of Commerce and Finance Ministry, to look into it. Everyone knows that tourism is the engine of economic growth and helps create jobs in millions everywhere in the country.
With the WTO pointing India out on passing on exports benefits through schemes like SEIS which is not permissible as per the WTO agreement, the country has moved to schemes like PLI (Productivity Linked Incentives) so that all the manufacturing companies get incentivised in the identified sectors.
Batting for tourism, Sapra says, “What is the differentials in terms of the disabilities with the competing or the neighbouring countries which is South-East Asia? The thing that differentiates there is that the tax burden which other countries have varies from 5% to 7%, while in India the tax burden is substantial. Furthermore, tour operator services get hit on a multiple level. A tour basically consists of a hotel booking, local transport, sightseeing and the profit margin. There are certain components of GST already embedded into that, like a five-star hotel is at 18%. Over and above, when a tour operator sells a package, he charges 5%. So, there is a tax structure of 12% to 14% which is getting embedded into the tour operator services which is being exported. It doesn’t happen in other countries.”
At the same time, the principal of exports says to export the goods and services without the taxes being levied. “Instead, this should be taken care of by GST scheme but unfortunately the way the GST scheme is formulated, a lot of taxes get embedded in goods and services, and this is very prominent in case of tour operating services,” Sapra adds.
Road ahead
The critical challenge lies in the definition pertaining to tourism services exports which is not the same as in goods services exports which benefits with no taxes levied on the output side while for any input tax, there is refund. Another important aspect highlighted was that it is the tour operators who are the ones bringing out the business and others like hotels, transporters and others are providers of services and therefore cannot be treated at par with tour operators.
The contours and fine prints of new Foreign Trade Policy will be known in less than a couple of months. SEPC has requested all stakeholders, including IATO, to also make a very strong representation. SEPC, informed Talati, has received a strong presentation by the hotel industry addressed to the Finance Minister and the second point in this presentation is with regard to incentives.
“We have already made a presentation that just as RoDTEP is given to manufacturer by changing the incentives scheme, we presented them with the scheme of DRESS (Duty Remission of Export of Services Scheme). They are studying it but somehow it appears that they are not happy and are asking us to give different alternatives on which we are working. But the whole idea is that there should be representation not only from SEPC but also by IATO to the Finance Ministry, Ministry of Commerce and to the PMO. I would urge the President of IATO to make a very strong representation that incentives to service exporters just at any cost cannot be discontinued. It is not like we are banking upon the money that they are giving but it is the real incentive which in turn will increase the exports,” says Talati.
According to Abhay Sinha, Director General, SEPC, while discussing DRESS Ministry of Commerce has also suggested SEPC come out with a few sector specific alternative scheme. Now it’s an opportunity. The FTP has already been extended. We have time. We can brainstorm and come out certain framework keeping in view the Government’s concerns as to why SEIS is being withdrawn. We will definitely be making a good representation if a credible alternative scheme is given to us.
Beyond SEIS
So what else besides SEIS? What does SEPC brings to members in the value chain of Services exports as the SEPC membership is key to avail various others support schemes that MoCI has for the Services exporters like tourism. Talati asks tour operators of all size to become SEPC members, urging, “Not only should the large, but the medium and small tour operators also become members of SEPC. The fee is very nominal, and you will get substantial benefits from the services that are being rendered.”
“When we talk about incentives and handholding, getting the inbound tourist, SEPC has a major role to play in promotion, development and facilitating enabling environment. There are schemes for services exporters, through SEPC, that can help stakeholders promote their businesses and better access international market,” informs Sinha.
Market Access Initiative Scheme helps services exporter access international market. Earlier there was another scheme called Market Development Assistant Scheme, but now the two have been merged together, informs Sinha. For various knowledge and confidence building exercise, MoCI, through SEPC, gives incentives of upto Rs.1 crore by means of subsidizing cost.
Besides Ministry of Tourism, MoCI also provides various support schemes available for marketing and branding that tourism services exporters can take advantage of. “There are some very good templates already available in various other sectors like engineering, textiles, pharma etc. This can also be used by exporting community in travel and tourism sector and IATO can play a very crucial role there,” Sinha says while further adding that tourism exporters are also incentivized for participating in overseas exhibition by means of partial reimbursement of participation as well as travel cost.
SEPC is also planning a new tourism RBSM (Reverse Buyer-Seller Meet) event. SEPC organises its annual flagship GES (Global Exhibition on Services) event aimed at promoting various services sectors, including tourism. The council is now planning to organise an event exclusively for travel and tourism services exports and will invite global agency buyers from around the world. Tourism services providers will not only benefit from subsidized participation but also the focused b2b meetings, whereas buyers will be hosted by MoCI through SEPC.
MoCI has also earmarked upto Rs. 2 crore per company per annum in case a company needs to meet any regulatory compliances or registration in another country in order to conduct business, or in case Indian tour operators may be required to register in another country to sell their packages there. Pharma, textiles and some other services sector industries have used this scheme to great advantage.
Ministry of Tourism have also come up with a scheme where they have involved SEPC to play the nodal role that could benefit inbound tour operators for up to Rs. 2 lakh even if the forex earning is, say, nil.
Under the International Co-operation Scheme of Ministry of Micro, Small & Medium Enterprises (MSME), SEPC is signing MoU with MSME that can help new tourism services exporters claim its membership fee of SEPC for the first year.
