How Taxation or Incentives are Used for Sustainable Tourism

By Dripto Mukhopadhyay

It is expected that by 2020 this figure would double with large increases in tourism activities in the world’s poorest regions. Studies suggest that tourism sector generates about 11 per cent of the world’s Gross Domestic Product (GDP) and creates more than 5.5 million jobs world-over every year. Being highly labour intensive, the sector provides vital employment for people with a wide range of skills as well as for the unskilled. These numbers themselves are adequate enough to suggest that tourism activities have immense potential to play a significant role in the economies of the countries and regions.

However, though tourism is a sector which generates large extent of revenue as well as employment, it is also an undeniable fact that tourism activities often have a significant adverse impact on environment in tourist destinations, including congestion and pollution. Conventional tourism activities lead to the dangers of dependency with non-local ownership, enormous pressure on utility and infrastructure supply, surge in price of the commodities, degradation of local art and culture, rise in crime rate, prostitution, spread as diseases such as AIDS among the local communities, large scale environmental degradation. These menaces affect the local community, environment and the society which, finally, severely leading to the tourism industry’s decay in the long run. These concerns have led to the emergence of paradigm of sustainable tourism in recent years, particularly as the numbers of tourists and the distances they travel have increased significantly over years. Such developments have experienced activities such as use of eco-labeling to activities and destination, for example the use of ecotourism, and the raising of taxes on tourism activities in order to control damages of the environment as well as to raise revenues to correct such environmental damage caused. This article is an attempt to understand the perspective of use of economic instruments for developing sustainable tourism development.  The article discusses the international experience regarding this as well as portrayed similar activities from Indian perspective.

Before discussing the economic instruments to foster sustainable tourism development, it is germane to have a clear understanding of the sustainable tourism activities. It has been widely accepted that poorly managed tourism can lead to:

• Degradation of heritage sites
• Commodification of the sacred
• Create a market for prostitution and drugs
• Reduce biological diversity
• Destroy habitat for wildlife
• Pollute lakes
• Overuse valuable fresh water resources
• Contribute significantly to global warming
• Leads to loss of scenic beauty
• Reduce the pleasure and satisfaction obtained from an un-spoilt environment

Experiences throughout the world suggest that poorly planned and managed tourism that fails to support its environment base, results in falling market share and sows the seeds of its own destruction. Environmental deterioration will inevitably lead to economic destruction, where the impacts of poorly planned and managed tourism development results in long-term problems that out-weigh the short term benefits that tourism may bring. With the potential for self-destruction achieving a more sustainable option is becoming the most important issue facing tourism.

Several definitions are in use to demarcate sustainable tourism activities from the normal tourism activities. The distinctions majorly arise from the differences in the definition of sustainability itself, and the obvious impacts on how certain sectors can be seen from the point of view of sustainability. In general, sustainable tourism development can be defined as equitable and self-sustaining tourism activities that can provide a unique visitor experience and an improved quality of life of the host community. In one of the most precise definition, according to Butler (1993), sustainable tourism could be defined as tourism “which is developed and maintained in an area (community, environment) in such a manner and at such a scale that it remains viable over an indefinite period and does not degrade or alter the environment (human or physical) in which it exists to such a degree that it prohibits the successful development and wellbeing of other activities and processes. This intrinsically implies that the tourism industry must ensure that tourist visits will be maintained and tourism resources will retain their attractiveness indefinitely. There must be no (or only minimal) adverse environmental, social and cultural impacts. All these must be achieved through maintaining the principles of sustainable development. The dimensions that are essential part of sustainable tourism are:

1)      Human dimension–

• Health and population – Physical and mental health, disease, mortality, fertility and population change.
• Wealth– Economy, financial system, income, poverty, inflation, employment, trade, material goods, infrastructure, basic need for food, water and shelter.
• Knowledge and Culture – Education, research, state of knowledge, communication, systems of belief and expression.
• Community – Rights and freedoms, governance, institutions, law, peace, crime, civil order.
• Equity – Distribution of benefits and burdens between males and females and among households, ethnic groups, and other social divisions.

2)      Ecosystem Dimension

• Land – Diversity and quality of forests, farmland, and other land ecosystems, including their modification conservation and degradation.
• Water – Diversity of quality of inland water and marine ecosystems, including their modification by dams and other structures, pollution and water withdrawal.
• Air – Local and indoor air quality and condition of the global atmosphere.
• Species and Genes – Status of wild species and wild and domesticated (crop and livestock), populations, genetic diversity.
• Resource use – Energy and materials, waste generation and disposal and recycling. Pressures from agriculture, fisheries, timber, mining and other resource sectors.

Economic instruments

Generally economic instruments can be of two broad types, a) taxes and charges and b)financial incentives and agreements. The measure of taxes and charges works through factors, namely cost, price and income, which have long proven to be the major influencing ones on choices and decisions made by enterprises and consumers. These can be applied flexibly and adjusted readily. However, they are indirect instruments, and it is therefore difficult to be sure that the net effect will be that which was intended. Imposing taxes and setting charges can have two important consequences for the sustainability of tourism:

• Changing the behaviour of consumers and enterprises, through affecting the prices, costs and income in a tourism destination or for a particular tourism product. Levying taxes and charges can be constructed so as to penalize unsustainable practice such as pollution, and to change the pattern of demand for a particular tourism product
• Raising revenue from consumers and enterprises of a destination and using that revenue to mitigate impacts and support activities such as conservation of the micro-ecosystem or initiating community projects that lead to greater sustainability of the destination or the product. To ensure this, taxes should be constructed in such a manner that the revenue through these measures is restricted to specific types of use rather than simply going into the general public fund.

Financial incentives and agreements are economic instruments that influence the behaviour of enterprises by providing them with specific financial support or commercial opportunities. This may involve:

• Providing financial support and opportunities themselves.
• Influencing and working with development assistance agencies whose policies in recipient countries are increasingly influenced through priorities and programmes agreed with governments.
• Influencing the financial decision making policies and actions of commercial sources of finance.

Tourism sector can be taxed with by taxing the business enterprises involved with providing services or by taxing the tourists directly. This can be done by either levying the general tax prevailing in the economic system or through imposing special tourism taxes. The World Tourism Organization identified a total number of 40 different types of taxes in tourism sector in both developing and developed countries. There are a few additional taxes relating to tourists’ use of natural environmental and general taxes are also there to add to the list. Out of a total of 45 taxes, 30 are payable by the tourists and 15 are payable by the business enterprises.

Tourism taxes can be categorized into five broad groups as given below.

• Airlines and airports –
• Road transportation and other transport related
• Hotels and other accommodation
• Food and beverages
• Providers of tourism services

Significant increase in number of international and domestic travelers over the years, especially in the developed countries, has made this sector lucrative from taxation point of view. However, in many of the developing countries the trend is to tax the airports heavily since they do not have many airlines to impose tax upon. Hotel and accommodations sector is normally the most important revenue generator of the tourism industry and is also easier impose to tax upon. However, the practicalities of taxing the accommodation sector also varies between developed and developing countries and trends are found to be more problematic in the case of the latter. The hotel sector is often highly subsidized or receives investment and tax incentives from the government in developing countries, with the aim of attracting foreign and domestic investment to the sector. The motivation is twofold, first to expand the sector as a part of a policy to expand the tourism industry and second, to protect the sector because it is a relatively unstable one due to its highly seasonal nature. Road transport, especially, car rentals etc., food and beverages and tourism services are relatively easy to tax. But due to the fragmented nature of these sectors they do not normally contribute a major proportion of tourism revenue. They include such sectors as entertainments, handicrafts, jewellery and other souvenirs.

In many of the developing countries these activities form part of the informal sector or hard-to-tax formal sector. It is difficult to raise much revenue from this source. New tax regime has seen the introduction of eco-tax in several countries. This is specially to confront the degrading the environment both in developed as well as developing countries. However, in developing country levying this tax is still in its nascent stage. A component of eco-taxes related to ecotourism which is a relatively new form of taxation that destinations levy in an attempt to counter the environmental damage caused by mass tourism. Carbon tax and landfill taxes are more general environmental taxes on the level of carbon emissions and wastes respectively, but are borne by tourists as well. Apart from these taxes, gambling (in-shop and racing) related taxes are also common source of revenue though is not legal in some countries. Tourists are involved in gambling and casinos, and hence bear the tax associated with those activities. The tax can be levied on the suppliers rather than tourists as in the case of the UK where the betting tax that was initially levied on the gamblers is now levied on the gross profit of bookmakers.

Table 1: Tourism Tax Typology

Sl. No.	Sector	Name of tax	Payable by
	Entry/exit tax	Resident departure tax/foreign travel tax	Customer
		Visa/travel permit	Customer
	Air travel	Air passenger duty	Customer
		Air ticket tax	Customer
		Airline fuel tax	Business
	Airport/seaport/road borders	Departure tax	Customer
		Passenger service tax	Customer
		Airport security tax	Customer
		Airport parking tax	Customer
		Transit taxes	Customer
		Trekking/mountaineering fees	Customer
	Hotel accommodation	Bed night tax	Customer
		Bed tax	Customer
		Occupation tax	Customer
		Differential VAT tax	Customer
		Surtax	Customer
		Sales tax	Customer
		Service tax	Customer
		Turnover tax	Business
		Hotel and restaurant tax	Customer
		Temporary lodging tax	Customer
		Hotel accommodation tax	Customer
		Lodging tax	Customer
		Fringe benefit tax	Business
		Payroll tax	Business
		Customs and excise	Business
	Restaurant	Sales tax/VAT	Customer
		Liquor taxes/duties	Business
	Road tax	Toll charges	Customer
		Fuel taxes/duties	Business
	Car rental	Municipal/local taxes	Customer
		Purchase duty	Business
		Petrol/diesel duty	Customer
	Coaches	Purchase duty	Customer
		Specific additional tax	Business
		Tourist transport tax	Customer
	Visitor attraction	Visitor attraction tax	Customer
		VAT/sales tax	Customer
	Training	Industry training tax	Business
		Catering tax	Business
	Environment	Eco-tourism tax	Business
		Carbon tax	Business
		Landfill tax	Business
	Gambling	Betting tax	Business
		Casino tax	Customer

Source: Adapted from WTO (1998)

Taxation on Tourism Sector: Some Example

Spain is one of the remarkable example is now accompanied by a certain interest in the application of specific taxes on tourist activity. Apart from normal accommodation tax and VAT on restautants, one can take the case of two taxes implemented in the Balearic Islands: the tax on rented cars, and the now-repealed ‘ecotasa’, a tax that seemed to combine the three objectives mentioned above: revenue collection, coverage of costs and internalization of the environmental costs. In Croatia the taxes most of the services related to tourism industry face are comparatively less than other goods and services. The VAT for accommodation, restaurants etc. is 10% compared to 23% on other goods and services. The comparative rates of VAT is given in Table 2. Its worthy noting the point that many of the European countries have reduced the VAT for tourism related services to considerable extent.

Table 2: VAT Rates Applied in European Countries as of 1st January 2010 relating to Tourism Related Services

Country	Standard rate	Reduced rate
Belgium	21	6/12
Bulgaria	20	7
Croatia	23	10
Czech republic	20	10
Denmark	25	–
Germany	19	7
Estonia	20	9
Greece	19	9
Spain	16	7
France	19.6	5.5
Ireland	21	13.5
Italy	20	10
Cyprus	15	5/8
Latvia	21	10
Lithuania	21	5/9
Luxembourg	15	6/12
Hungary	25	5/18
Malta	18	5
Netherlands	19	6
Austria	20	10
Poland	22	7
Portugal	20	5/12
Romania	19	9
Slovenia	20	8.5
Slovakia	19	10
Finland	22	8/12
Sweden	25	6/12
United Kingdom	17.5	5

                        Table 3: State-wise Luxuty Taxes in India

State/city	Luxury tax on room (incidence in %)
Mumbai	10.0
New Delhi	12.5
Gurgaon	10.0
Noida	5.0
Hyderabad	5.0
Chennai	12.5
Pune	10.0
Bangaluru	12.0
Kolkata	5.0
Goa	10.0
Agra	5.0
Jaipur	10.0
Kerala	15.0

Table 4: Central taxes which also affect tourism

Type of tax	Tax on	Rate (in %)
Service tax	Banquets	10.3
	Conferences	10.3

Apart from the normal taxes, Eco tax is a policy that levies taxes to promote ecologically sustainable activities via economic incentives. The ‘Eco tax’ on pollution or pollution-causing inputs and outputs reflects the costs of using environmental resources and thereby internalize the negative externalities in decision making by producers and consumers. In other words, it is a way of translating the ‘polluter pays’ principle into practice. Since this approach of internalizing the externality is based on Pigouvian approaches developed by economist Arthur Pigou, this tax is called as Pigouvian tax. The revenue generated through Pigouvian tax should be spent on correction for positive externality.

According to an Organization for Economic Co-operation and Development (OECD) survey in 1997, there were 284 environment-related taxes and charges in OECD countries, of which 181 were in use in the European Union3. Where more than one third of the environmental taxes/charges account for motor fuels and other energy product; vehicle taxes accounted for 12 per cent of the charges.

Several countries in the world have introduced eco taxes. Balearic Islands is one of the prominent example of eco taxes. Almost 12 million people arrive on the Balearic Islands in Spain each year where the number of permanent residents is only 0.76 million. The tourists contribute significantly to the local economy, but there are social and environmental costs. The regional government wants to move to a more sustainable form of tourism and plans to finance its programme through levying a tax on hotel stays. From May 2002, tourists are charged EUR 1 per night as eco-tax on all hotel bills. The hotel industry was required to cooperate with the introduction of the new measure when it became apparent that the tax enjoyed strong support among residents. Tourists appear to agree with the aim of the tax once it is explained to them. However, the pressure of the hotel sector has led to a failure in its implementation.  A diving tax of EUR 2.30 per dive was levied in the natural reserve in Medes Islands of Catalunya, Spain. The territory of the Cinque Terra located on the coast of north-eastern Italy has established a sustainable tourism project to protect the culture, heritage and environment. In order to control tourist numbers, a Cinque Terra Card is provided which includes access to all paths, nature observations centres, botanic paths, picnic areas and bird watching areas. Tourists exploring the region can purchase a 1, 3 or 7-day card which also provides unlimited access to the train and bus between villages. The fee goes to protect the trails, marine and national park.

Though in India eco-taxes are applicable in case of several other industries to protect the environment, regarding tourism the concept is still relatively new. Some measures that could be put in place are increasing the tax on motor fuel to encourage people to use more energy-efficient cars, taxing the dumping of waste in landfill sites to encourage recycling and alternative ways of dealing with waste disposal are some of the cases which affect tourism industry also along with other target groups. However, a few initiatives taken by several state governments are examples of eco-taxes that are precisely targeted towards sustainable tourism. The Uttarakhand government has decided to introduce eco tax upon entry into the hill station of Mussoorie, also referred to as the Queen of Hills. This tax will be levied in line with the Naini lake tax charged from tourists in Nainital. The rate of tax is Rs 100 from heavy vehicles and Rs 30 from cars and jeeps that are levied by the Mussoorie Municipal Board. Taxes are levied in case of all the reserve forests as well as areas that are vulnerable to environmental degradation due to tourists’ movements. In Himachal Pradesh also green tax or eco taxes are levied in several places. For instance, the Shimla Municipal Corporation has decided to impose green tax on vehicles bearing registration numbers of other states.

Apart from these, in several destinations taxes are levied as entry fee. These fees are applicable for tourists, vehicles and sometime cameras.

Conclusion:

Tourist activity has been used as a taxable item in accordance with a wide range of formulas and circumstances. However, none of these formulas can be described strictly as tourist taxes, since nearly all goods and services used by tourists (hotels, restaurants, flights, car renting, etc.) are also used by non-tourists. A corrective tax leads to the inclusion of environmental and congestion costs to internalize within total cost of the tourism package, by way of a Pigouvian tax, economic efficiency might be restored. In addition, its effect on the quality of the tourism offer can be significant and this directly affects the tourist willingness to pay and, therefore, the magnitude of the added value of the sector. Furthermore, the tax can be used with a variable time profile, in order to avoid congestion peaks and de-seasonalize and control tourist activity. Nevertheless, one cannot forget that in case tourism in the destinations that are price elastic, taxes may have an adverse impact and provide opportunities to substitutes. However, another important consideration is that the tax collected as eco tax or green tax should be spent in the destination region itself to counter the environmental losses the region faces, otherwise it would only burden willing tourists to pay more without reaching any gain to local environment or the tourism phenomenon at that specific area.