TCS hike in tour packages to have limited impact on demand: Report

The revision in the rate of tax collected at source (TCS) on overseas travel packages may not have a material impact on demand, ratings agency ICRA says in its latest report on travel operators’ revenues. The TCS rate hike may have a “limited impact” on demand as expenditure per individual per trip is usually much less than the ₹7 lakh threshold for over 80% of tour packages, it adds.

The increase in TCS rates had come into effect from October 1, 2023. The government announced that 20% TCS will be applicable on remittances covered under the Liberalised Remittance Scheme (LRS) scheme from July 1, 2023, except for education and medical purposes. It was also announced in March that credit card payments will be brought under the LRS.

In May, the government amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000 by omitting Rule 7, which exempted international credit cards from the Liberalised Remittance Scheme (LRS). These amendments increased the rate of TCS from 5% to 20% for remittance under LRS as well as for the purchase of overseas tour packages.

The finance ministry also clarified that there will be no change in the rate of TCS (tax collected at source) for all purposes under the LRS and for overseas travel tour packages, regardless of the mode of payment, for amounts up to ₹7 lakh per individual per annum.

ICRA says the Indian tour and travel sector is poised for a healthy growth of 12-14% in fiscal 2025, driven by continuing high airfares and volumes almost at pre-Covid levels across segments, including long-haul travel where visa-related challenges are easing.

“To be sure, the growth in fiscal 2025 will be on a high base of the current fiscal, where the sector is poised for a robust on-year revenue growth of ~30%, or ~18% above the pre-pandemic peak,” says the ratings agency.

Operating margin, too, is expected to be healthy at above 6.5% this fiscal and the next, despite higher promotional spending, backed by operating leverage benefits and various cost optimisation or automation initiatives undertaken since the pandemic. Healthy cash flows and strong balance sheets will support credit profiles.

This has been four major travel operators accounting for 60% of the domestic sector revenue, indicating as much.

Says Poonam Upadhyay, director, CRISIL Ratings says the growing overseas travel aspirations of people, especially after the pandemic, and rising demand for short getaways are propelling the growth of Indian tour and travel operators.

However, tour operators could face some challenges concerning monitoring the limit per traveller in the transitional period due to the lack of adequate tracking mechanisms for travel spending, the ratings agency adds.

Domestically, the ratings agency thinks that the domestic leisure segment will continue its healthy growth trajectory, fuelled by an increasing preference for short breaks and improving infrastructure and last-mile connectivity.