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Welcome to the second episode of our series on incentive policies by EY India Insights Podcast. I am your host Kanchan Umranikar, Director at EY India's Indirect Tax practice. In the previous episode, we talked about the intricacies of Maharashtra IT/ITES Policy 2023 and why it is such a game changer for the IT industry in Maharashtra. Today, we will discuss the state incentives available to tourism units.

We will also cover a comparative landscape of the incentives available to this  sector across states for the audience. Tourism is an important sector and thus multiple states have sector-specific policies around it. These include incentives, ease of doing business measures, simplified regulatory measures and so on. To discuss this topic in depth, we have EY India Indirect Tax Partner Bhavesh Thakkar with us, who focuses on incentives and subsidies. He has assisted over 200 entities in obtaining incentives across various sectors in India. Welcome, Bhavesh. Thank you for being on the podcast again.

Bhavesh: Thank you, Kanchan. Great to be back here.                   

Kanchan: To start off with our tourism sector related discussion, can we talk a little bit about the focus placed on the tourism industries specifically by different state governments?

Bhavesh Thakkar: Certainly. The tourism sector is one of the focus areas for state governments and rightly so, because it has a high potential for employment generation and also the earnings in foreign exchange it can generate. So, this is apparent to the tourism specific policies announced as well as its classification as a thrust sector in many of the states.

Kanchan: That is indeed a positive for investors in this sector. So, who all can avail these incentives for tourism sector?

Bhavesh: The eligible units or entities for tourism incentives include hotels, resorts, health farms and wellness centers, film tourism, and also newer sectors like wildlife and desert tourism, amusement and water parks, etc. So, the type of activities are specified under the respective policies of the state governments. Also, any kind of a setup like partnership firms, private limited companies or even proprietorships would be eligible to apply under the policy. That means a variety of activities can be eligible for incentives.

Additionally, the incentives are not restricted to just the new tourism ventures. Existing units are also eligible to apply for incentives for any expansion that they undertake, provided that they meet the specified conditions in the policy.

Kanchan: That is very inclusive. It shows the broad perspective state governments are showing  towards this sector. Can you throw some light on the kind of incentives that are available?

Bhavesh: The availability and quantum of such incentives varies across the country. States mostly offer either a capital subsidy or a Sate Goods and Services Tax (SGST) reimbursement. Certain states also offer a turnover-based subsidy. States like Karnataka, Gujarat and Madhya Pradesh offer a percentage-based capital subsidy on fixed capital investment that usually varies between 15-25% depending on the kind of tourism activity. This is a straight cashback, based on the actual eligible capital expenditure incurred within a set time-period.

Moving to SGST, Maharashtra offers a 50-100% net SGST reimbursement for 10-20 years based on the location and size of investment. The advantage to tourism sector is that 100% of the end consumption would happen in the state, allowing for a higher SGST incentive claim. And the states offering turnover-based subsidies grant incentives as a percentage of the turnover specified in audited financial statements, capped to a fixed percentage of the project cost.

Kanchan: So overall, the benefits we can see are capital subsidy and tax linked subsidy. Are there any other incentives in addition to these ?

Bhavesh: Yes, indeed. Other incentives include expenditure-linked incentives such as stamp duty exemption on lease, or purchase of land or building, an electricity duty exemption for a specified period, or an employment training cost reimbursement. Again, these vary from state to state. Together, these incentives result in a positive cash flow support during the investment lifecycle.

Kanchan: Are these incentives influenced by any specific factors ?

Bhavesh: Yes. Usually, incentives are influenced by two primary factors – location and the size of investment. Location is an important aspect of policies like in Maharashtra and Karnataka. These policies divide the states’ areas into multiple zones, based on the level of development. Lower the development in the zone, higher will be the incentive quantum.

As for the size of investment, any investment, may it be small or large would be eligible for incentives. The incentive’s quantum would be different as per the size of investments.

Kanchan: Are there any other key parameters considered while evaluating an investment?

Bhavesh: Yes, there are usually two other conditions for investors. First is the local employment condition, mandating a specified percentage of the workforce to be state domiciled, and second condition talks about the operative period - the minimum number of years a unit has to operate to avail and retain those incentives. Some states may also offer a tailor-made incentive to very large projects as per employment potential, project’s contribution to the state exchequer, etc. on a case-to-case basis.

Kanchan: Can you walk us through what kind of procedures are employed by applying for these incentives?

Bhavesh: The first thing is the policy applicability, and it will be decided on the basis of effective steps such as effective possession of land and registration of the entity. This is completed before filing the initial application. Each state has its own incentive process flow with the following key steps.

Generally, there is a concept of an initial application, a final application, and an application for refunds. These applications are filed with the policy implementation agency who will review and validate them and conduct physical verification of the project premises as necessary. It is important to note that if the timelines are not adhered to, it may directly impact the availment of incentives.

Kanchan: That means applying at the right juncture is the most important thing.

Bhavesh: Absolutely, Kachan.

Kanchan: Any concluding remarks? What are other aspects that may easily get missed out?

Bhavesh: To summarize, firstly, we have seen that with other sectors such as manufacturing, the awareness level of policies and incentives available is much higher than it is for the tourism sector. Due to this, most of the projects miss out on the available incentives and with the capital and other subsidies that we discussed earlier, an investor can get back 25 to 100% of the project cost as subsidies.

Investors can also consider the state-wise comparison of policy terms and benefits before the investment decision to maximize the incentive potential. Additionally, entities can file customized applications for large investments qualifying megaprojects criteria by way of negotiations with the respective state authorities. And lastly, the key point to note is timeline. Investors should file their application to avail the incentive before the timelines defining the policies and reap the benefits available.

Kanchan: Thank you, Bhavesh. That has surely given our listeners  a lot to think about when it comes to investment in tourism industry, and they may even reach out to us for any clarifications. I would like to thank you for taking the time out to be here today and providing your thoughts.

With that, we have come to the end of this episode. There are other episodes in the pipeline that will focus on other sector-specific incentives. Please do let us know in case you want to hear about a specific topic. Thank you for listening in and this is Kanchan signing off.

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