Trip cancelled: what happens to the GST and the TCS

A client cancels three weeks before a Bali departure. You keep 40% of the booking value as your cancellation fee, refund the rest, and then the questions start on WhatsApp: "why isn't the GST coming back too?" and "what about the TCS you took?" Both answers feel wrong to say out loud, so you end up refunding more than you owe, or looking evasive.

A cancelled booking actually triggers two separate tax events, and most of the confusion comes from treating them as one. GST has an opinion about the money you keep, and a different opinion about the money you give back. TCS, once collected and deposited, isn't really yours to refund at all, whatever the client assumes.

This post separates the two, gives you the paperwork each needs, and ends with a client-facing paragraph you can forward instead of re-explaining it every season.

What actually happens when a booking is cancelled

One cancellation splits into four tax questions, not one. GST applies at the package rate to whatever you retain as a cancellation fee. GST on the refunded portion comes off your own output liability only through a credit note or refund voucher, filed before a cut-off date. TCS you already deposited sits against the client's PAN, not your bank account, so you can't hand it back directly, and the client recovers it only by claiming it in their own income tax return.

Operators usually get the first wrong (a flat 18% cancellation fee regardless of package rate) and the third wrong (promising a TCS refund they cannot legally give). Both are avoidable once you treat a cancellation as two unrelated tax events, not one.

GST on the fee you keep: same rate as the package, not 18%

The GST on a cancellation fee is charged at the same rate as the underlying package it relates to, not a flat 18% across the board. CBIC Circular No. 178/10/2022-GST clarifies that an amount retained for allowing a booking to be cancelled is consideration for a "facilitation of cancellation" service, taxable at the rate that applies to the principal supply.

That matters because most Indian tour operators invoice packages under SAC 9985/998552 at 5% without claiming input tax credit, or at 18% with full ITC (ClearTax, GST on Tours and Travels, as of August 2026). If your package sat at 5%, your cancellation fee sits at 5% too. Charging 18% out of habit is a common shortcut, and an expensive one the moment a client or an auditor pushes back.

Example: A Ladakh package priced at ₹1,00,000 per person, invoiced at 5% GST without ITC. A client cancels and, per your policy, forfeits ₹15,000. GST on that ₹15,000 is 5%, or ₹750, not 18% (₹2,700). Charge 18% by habit and you'll have collected ₹1,950 in tax you were never entitled to, and will eventually have to account for.

The same circular draws a line worth knowing, because it cuts the other way in a different situation. Pure forfeiture of earnest money, say on a property deal or a failed tender, is "a mere flow of money" with no service attached, and isn't taxable at all. A tour cancellation fee doesn't get that treatment: you're supplying something real in exchange for it (releasing the booking, adjusting supplier holds, processing the cancellation), so it's a taxable facilitation supply at the package's own rate.

Hotel and cruise bookings sold as part of a package fall under the same SAC and the same 5%/18% choice as the rest of the tour (ClearTax, GST on Tours and Travels), so a cancellation fee tied to a hotel-inclusive package follows the same rule: same rate as whatever the package was invoiced at.

If you're on the 5%-without-ITC scheme, you also generally can't claim credit against GST your own suppliers charge you on a cancellation penalty, the one exception being GST paid to another registered tour operator for services used as an input (TaxClue, GST on Tour Operators & Travel Agents 2025-26). A supplier's penalty on you doesn't offset the GST you owe on the fee you charge your client.

GST on the amount you refund: credit note or refund voucher

Which document you owe depends on one fact: had you already raised a tax invoice, or only taken an advance? If a tax invoice was issued and the supply is now cancelled or reduced, you issue a credit note to bring your taxable value down. If only an advance receipt was raised and no invoice followed, you issue a refund voucher instead (TaxAdda, Refunds under GST).

Getting the document right isn't paperwork for its own sake. It's the only way your GST return reflects that you no longer owe tax on money you've given back. Skip it, and your output liability stays inflated on record after the refund has already left your account.

Careful: A credit note only reduces your GST liability if you declare it within a statutory cut-off date after the end of the financial year the original invoice fell in. Sources disagree on the exact date in force, and this deadline has already moved once, in 2022. Confirm the current cut-off under Section 34(2) CGST Act with your CA, especially for a cancellation straddling a financial year end.

Miss that window and you've still refunded the client, but you can no longer recover the GST you'd paid on that amount, turning a client refund into a straight loss on your own books.

TCS is not the operator's to refund

TCS you've already collected and deposited cannot be refunded by you directly, however reasonable the client's request sounds. Once deposited, it's credited against the client's own PAN and shows up in their Form 26AS/AIS. The client recovers it only by claiming it in their own income tax return (ClearTax, TCS on Overseas Tour Packages), not from you.

This trips up operators because the money moved through your account, so it feels like yours to give back. It isn't, once it's deposited with the government. TCS on an overseas package sits within the client's overall Liberalised Remittance Scheme spend for the year, the same ceiling that covers their outward remittances plus overseas hotel and transport costs (RBI, Master Direction, Liberalised Remittance Scheme). The tax collected follows the client's PAN, not your invoice.

Careful: The current TCS rate, threshold and the form the client uses to claim it back have moved more than once since the levy began, with further changes reported around recent budgets. As of August 2026, sources describe the current position differently. Don't quote a rate, threshold or form number to a client from memory; confirm the current position with your CA first.

What you can do is point the client to where their money actually is: Form 26AS or AIS, once the deposit reflects, and their own return. A plain-language TCS refund explainer written for clients is worth keeping ready to forward rather than retyping the same explanation each time.

The four scenarios, side by side

Scenario	What happens to the money	GST treatment	TCS treatment
Full cancellation	You keep the agreed fee, refund the rest	Fee taxed at package rate; refunded amount needs a credit note or refund voucher	Already-deposited TCS stays with the client's PAN; not refundable by you
Partial cancellation (fewer pax)	You keep costs already committed for the dropped pax, refund the balance	Same split as full cancellation, scaled to the reduced value	TCS adjusts on the reduced value for future collections, not on amounts already deposited
Date change	Usually a rebooking, not a cancellation, if the underlying package survives	No refund event if value is unchanged; treat as a fresh cancellation only if the original booking is actually cancelled and rewritten	No TCS event unless the booking is genuinely cancelled and rewritten
No-show	You keep the full amount, nothing is formally refunded	Full value stays taxed at the original package rate; no credit note needed since nothing was refunded	No refund question arises since TCS was correctly collected on the original amount

Careful: The date-change and no-show rows are this post's reasoned extension of the same cancellation-fee logic, not a government ruling naming either scenario. Check a genuinely disputed case with your CA before you invoice it.

What to hand the client so this doesn't become a WhatsApp fight

Most of this argument disappears if you send it in writing before the client asks a second time. Something like:

"The GST on the amount we've retained as a cancellation fee is charged at the same rate as your original package. It isn't an extra charge. The GST on the amount we're refunding has already been adjusted on our end through a credit note, so it won't appear as a separate cash refund, it reduces what we owed the government on your booking. The TCS already deposited against your PAN cannot be refunded by us directly. It will show in your Form 26AS or AIS, and you can claim it when you file your income tax return this year. Happy to share the deposit details for your CA."

Keep a version on file, perhaps alongside your GST-ready advance receipt format, since the same client usually asks about both in one conversation, so you're forwarding an answer rather than composing one under pressure.

Mistakes that cost operators money or draw a notice

• Charging 18% on every cancellation fee out of habit, regardless of what the underlying package was invoiced at. If the package was 5%, the fee is 5%.
• Missing the credit-note filing deadline, which turns a legitimate refund into a permanent loss of GST you'd already paid.
• Promising "we'll get your TCS back for you", which you legally cannot do once it's deposited. Say what's true instead: it's recoverable, but only through the client's own return.
• Treating a date change as automatically GST-neutral without checking whether the original booking was actually cancelled and re-invoiced. If it was, the cancellation rules above apply in full.
• Not separating the TCS deposit from your own output GST liability in your books, which makes either number harder to explain if a client or a GST officer asks for the split. Getting GST on the original advance recorded correctly at booking makes this reconciliation easier when a cancellation lands months later.

Getting your cancellation policy to match what your own suppliers actually refund you is a separate, non-tax problem, but it sits right next to this one: promise a refund your hotel won't give you, and the GST and TCS mechanics above are the smaller of your troubles.

Common questions

Is GST applicable on cancellation charges?

Yes. A cancellation fee retained by a tour operator is consideration for a facilitation service, and CBIC's own circular treats it as taxable at the same rate as the underlying package, not as a separate flat rate. A 5%-without-ITC package keeps a 5% cancellation fee; an 18%-with-ITC package keeps an 18% one.

What is the GST rate on a forfeited advance?

It depends on what the forfeiture is for. An advance forfeited as a tour cancellation fee is taxed at the package's own rate, same as any other cancellation charge. Pure earnest-money forfeiture with no accompanying service, the kind seen in property or tender disputes, is a non-taxable flow of money instead, but that carve-out doesn't apply to a travel booking, where you're providing the actual service of processing the cancellation.

The short version

• A cancellation triggers two unrelated tax events: GST on what you keep and refund, and the fate of TCS already deposited. Don't handle them as one problem.
• The cancellation fee you retain is taxed at the same GST rate as the underlying package (CBIC Circular 178/10/2022), not a flat 18%.
• The refunded portion needs a credit note (if you'd already invoiced) or a refund voucher (if only an advance was taken), filed before the statutory cut-off, or you lose the tax adjustment for good.
• TCS already deposited sits against the client's PAN in Form 26AS/AIS. You cannot refund it directly; the client claims it only through their own income tax return.
• Confirm the current TCS rate, threshold and the credit-note filing deadline with your CA before quoting either figure to a client.
• Have a written client-facing explanation ready before the first cancellation of the season, so you're forwarding it instead of retyping it under pressure.