Deloitte Touche Tohmatsu Presents An Analysis Of Budget 2004

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:
• The passengers handled by at the AAI airports grew from 399.83 lakh in 01-02 to an estimated 437.23 lakh in 02-03; while 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 crore and the revenue portion is Rs 186 crore. Some of the highlights are as follows:

• Outlay on tourist infrastructure has been increased from Rs 183 crore to Rs 279 crore (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 (ASI) seems to indicate the commitment for preservation of the heritage and historic sites in India, which in turn can be expected to increase tourism products for tourists - both local and overseas.
• An increase in the outlay for the Zonal Cultural Centres, seems to be directed at increasing the development of the composite & diverse cultures of the various states in India. This should augur well for inbound tourism.

Foreign Direct Investment (FDI)

FDI cap for civil aviation has been increased from 40 per cent to 49 per cent

Implication

There is a larger incentive for multinational companies to invest in the airline sector. This coupled with the increase of MICE activities in India and the greater interest in no-frill airlines may attract foreign investment into the country for setting up airlines.

Lease payments to acquire aircraft / aircraft engine

Income Tax exemption for payments in respect of agreements entered into on or after September 1, 2004 by Indian companies engaged in aircraft operations for lease of aircraft or aircraft engine will be withdrawn. Income Tax, if borne by Indian companies, in respect of such agreements will be exempt.

Implication

This would render the cost of acquisition of aircraft on lease basis to be more expense, as there is a likelihood of part or of full of the tax component (as dictated by the tax treaty with that country), being transferred to the Indian company,. To that extent, this could be a dampener for airline companies. Also, airline companies may be encouraged to explore countries where the tax treaty does not provide for lease of industrial and commercial equipment to be considered as royalty.

Service tax - highlights

1 Service tax has been increased from eight per cent to 10 per cent

2 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.

3 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. 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
• Tour operator service, as defined below

The 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

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

• Rent-a-cab scheme operators

60 per cent abatement

Implications

Tour Operators

The operating cost for the tour operator would increase, which would in all probability be transferred to the traveller. With the service tax being extended to any form of transport (not restricted to air travel), the common traveller would bear the brunt. This would also put cost pressures on the tour operators and the existing competition would increase, particularly as the price elasticity for tours is high.

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

1 Cost of events organised by hotels would increase.

2 The service tax on transport of goods by air & road, coupled with the tax on business exhibition services, would be a deterring factor on the MICE market.

3 The abatement on the proposed convention centres would mitigate some of the impact.

Domestic Air Travel

• Domestic air travel would 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 added pressure on airfares.
• With the airport services coming under the service tax umbrella, this would serve to increase the cost of service.
• With more places coming under the motorable roads with freeways - with lesser impact on cost and flexibility, there would some percentage of travellers who would take that alternative.
• The middle class may 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.

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.