The Fine Print

Deloitte Touche Tohmatsu analyses threadbare Union Budget 2004-05 to find its implications for tourism and hospitality

Background

Some of the key milestones for the period 2003-04 in the tourism industry, as per The Economic Survey, are as follows:

* Tourism industry registered a robust growth of 18.5 per cent (estimated) in foreign tourist arrivals.

* In absolute terms, the estimated tourist arrivals in 03-04 increased to 2.9 million compared with 2.5 million during 02-03.

* The estimated foreign exchange earnings increased by 26.5 per cent compared to 4.1 per cent growth in 02-03, increasing to an estimated US$ 3.8 billion during 03-04 from US$ 3 billion in 02-03.

* Domestic travel has grown by 9.3 per cent during 2003.

* Demand for travel to India has increased by nearly 23 per cent.

* In the area of foreign travel, the net inflow has turned negative during 02-03, for the first time in years, as can be seen in the following table:

(Amounts in Rs crores)
Foreign Travel 00-01 01-02 02-03
Receipts 14505 13880 14641
Payments 13136 10869 16761
Net 1369 3011 -2120

* The passengers handled at the AAI airports grew from 399.83 lakh in 01-02 to an estimated 437.23 lakh in 02-03; whilst the cargo handled at the AAI airports have increased from 854.28 metric tonnes in 01-02 to an estimated 979.36 metric tonnes in 02-03.

* In domestic air travel segment, besides Indian Airlines and the three private airlines, there are 37 non-scheduled operators providing air taxi/non-scheduled air transport services. The private sector accounts for 60.1 per cent of the domestic air traffic.

* Two new greenfield airports with private sector participation are proposed to be set up at Bangalore and Hyderabad.

The budget 2004-05 outlay proposals

Ministry of Tourism

The budget support has been increased from Rs 325 crore in 2003-04 to Rs 500 crore during 2004-05 - the capital portion is Rs 314 crores and the revenue portion is Rs 186 crores. Some of the highlights are as follows:

• Outlay on the tourist infrastructure has been increased from Rs 183 crores to Rs 279 crores (a 52 per cent increase)
• Outlay on training has been increased from Rs 19.5 crore to Rs 28 crore (a 44 per cent increase) .
• Outlay on overseas campaign from Rs 56 crore to Rs 90 crore ( a 61 per cent increase)
• A new outlay of Rs 17 crore has been introduced for information dissemination

Ministry of Civil Aviation

The budget plan outlay has been reduced from Rs 1736.26 crore in 03-04 to Rs 1602.98 crore during 04-05.

Ministry of Culture

The budget plan has been increased from Rs 225.20 crore in 2003-04 to Rs 400 crore in 2004-05, with the following highlights:

• Outlay in Zonal Cultural Centres increased from Rs 6.5 crore to Rs 20 crore
• Outlay in Archeological Society of India increased from Rs 45.5 crore to Rs 70 crore

Also, one significant development has been that the Inter-Institutional Group (IIG) has earmarked funds worth Rs 40,000 crore for infrastructure creation, including tourism.

Implications

* The IIG fund should provide the impetus to Tourism Boards for their plans for infrastructure and product development.

* A 52 per cent increased outlay for the tourist infrastructure is aimed in providing basic amenities for tourists visiting key tourism sites in India. An increase of 61 per cent in the overseas campaign expenses in making the inbound tourist more aware of the tourism sites in India. These steps should help in increasing the revenue receipts from inbound tourists - and reverse the negative net realisation from foreign travel in 2002-03.

* A larger outlay for the Archeological Society of India seems to indicate the commitment for preservation of the heritage & historic sites in India, which in turn can be expected to increase tourism products for tourists - both local & overseas.

* An increase in the outlay for the Zonal Cultural Centres, seems to be directed at increasing the development of the composite and diverse cultures of the various states in India. This should augur well for inbound tourism.Service tax - highlights

* Service tax has been increased from eight per cent to ten per cent

* A Education Cess has been imposed on service tax, as described below:

• Two per cent cess is being levied on the services subject to service tax
• Cess paid on input services shall be available as credit for payment of cess on output services

* New services related to tourism and hospitality that have been included:

• Business exhibition services
• Airport services
• Transport of goods by road (by a goods transport agency)
• Transport of goods by air
• Pandal or shamiana service
• Outdoor catering
• Construction services in respect of commercial or industrial buildings or civil structures
• Travel agents (other than air / rail travel agents)

* The following Service Tax exemptions have been withdrawn with effect from July 9, 2004

• Mandap keeper services provided by hotels.

8 However, 40 per cent abatement will be allowed if catering is also provided.

* The following Service Tax exemptions have been reduced with effect from July 9, 2004

• 4 Tour operator service, as defined below

8The scope of the definition of tour operator is being expanded to include persons engaged in the business of planning, scheduling, organising or arranging tours (which may include arrangements for accommodation, sightseeing or similar services) by any mode of transport.

• Reduction of the abatement from 90 per cent to 60 per cent for non-package tours

* The following Service Tax exemptions have been introduced with effect from July 9, 2004

• Convention Centre

8 40 per cent abatement on convention service when catering is also provided

4 Rent-a-cab scheme operators

8 60 per cent abatement

Excise - highlights

* Education Cess has been introduced:

• Education cess is being levied on excisable goods manufactured in India.
• Cess will be two per cent on the aggregate duties on excise payable on such goods.
• The credit of cess paid on inputs and capital goods shall be available as credit for payment of cess on the final products, as per the Cenvat Rules 2002.

* Excise duty on the following items has been increased

• Cakes & pastries - from eight per cent to 16 per cent
• Iron & steel - from eight per cent to 12 per cent

* Excise duty on the following items has been reduced

• Branded and packed preparations of meat, fish and poultry - from 16 per cent to eight per cent

Implications

* FIT - Free Individual Traveller:

• With the increase in direct taxes, including the cess being levied on the salaried class, the disposable income may be reduced. And with the already low interest for travel among Indians (travel being considered as a luxury), there could be an impact on middle class families travelling - both within India and overseas.

* MICE

• Cost of events organised by hotels would increase.
• The service tax on transport of goods by air and road, coupled with the tax on business exhibition services, would be a deterring factor on the MICE market.
• The abatement on the proposed convention centres would mitigate some of the impact.

* Domestic air travel:

• Domestic air travel may see a churn.
• With the ATF pricing already high and the proposed hikes due to the international oil pricing, airlines have had to increase airfares.
• With the no-frill airlines, one already operational on main routes and some more expected, the competition would deepen, resulting in more pressure on airfares.
• With the airport services coming under the service tax umbrella, this would serve to increase the cost of service.
• Also with more places coming under the motorable roads with freeways - with lesser impact on cost and flexibility, there would some percentage of travellers who may take that alternative.
• The middle-class may be continue their travel by trains, although there would be competition from road transport operators as well.
• There will be a play among these factors and one can expect the market to settle down in some polarised zones of travel.

* Hotels

• Inclusion of service tax on construction services, coupled with the increase in the excise duty on steel, would serve to increase the project cost for new hotels being commissioned.
• Food & Beverage: The increase on excise duty on items like cakes and pastries (a large item of consumption in hotels) and such items would impact the F&B revenue. However, the reduction of excise duty on the branded meat, fish and poultry would serve to reduce the cost of select food items, which could be transferred to the customer.
• With the occupancy rates in many segments at a high, the impact may be transferred to the customer, subject to the competitive forces in the market.

Conclusion

The budget proposals, which would be in operation between July 2004 and February 2005, seem to be a mixed bag. The proposed measures for increasing revenue may have some dampening affect on the tourism and hospitality players. However, there seems to be mid and long term strategic initiatives and intent in accelerating the momentum in the tourism sector, as can be seen by the increase in the outlays for the ministries of tourism
and culture.