Airlines want better deal for economy class


MUMBAI: The GST Council may have lowered the levy on economy class air tickets from 6% to 5% but airlines are demanding more, arguing that business and first class have got a better deal with input tax credit, or the deductions for taxes paid on various inputs.

For an airline `input’ means goods (aircraft, spares) and services (catering, ground handling, aircraft leasing) that it buys to provide an output -air travel. Under the existing GST model for economy class, however, airlines can claim ITC only on their input services. So, the 18% tax paid on catering and the 5% paid on aircraft lease rental can be subtracted from the 5% GST on economy class fare, but not the basic customs duty and 5% GST paid on importing aircraft and spares. Since aviation turbine fuel (ATF), which accounts for about 40% of an airline’s operating cost, has been excluded from GST, there is no tax credit on it either. Depending on the state they lift it from, airlines pay 4-30% sales tax on ATF.

At present, airlines pay zero tax on import of aircraft and aircraft spares, but from July 1 the tax on an Airbus A320 worth $50 million will come to $2.5 million. For a Boeing 787, which costs about $130 million, the tax will be about $6.5 million, a senior airline official told TOI. Without full ITC on economy class, the low-cost carriers would be severely hit. The new taxes on aircraft imports come at a time when Indian carriers have placed orders for over 1,000 planes. Indian carriers earn about 86% of their revenue from economy class, said Abhishek Jain, tax partner at Ernst and Young.They might need to raise fares to cover their costs, added Anita Rastogi, part ner, indirect tax at PricewaterhouseCoopers.

The government has, however, categorically said that the tax incidence on economy fares is not rising and even airlines seem to suggest that although the actual fare depends on demand and supply for tickets. “Currently, fares are high because of demand,” explained an airline executive, adding that the tax impact will be marginal.

In a letter sent to the finance minister , Alexandre de Juniac, director general of International Air Transport Association (IATA), said Indian carriers are concerned that ITC restrictions on economy class might favour foreign carriers that usually have more premium seats.
Although the 12% GST rate on business class is higher than the existing service tax of 9%, airlines can claim full ITC on their premium seats, resulting in significant cost savings.

Jain said, at the GST council meetings, the airline industry asked for withdrawal of customs duty and 5% GST on import of aircraft and spares if full ITC for economy class was not possible. Airlines are also worried about GST’s impact on long-haul flights. For instance, going by the definition of `continuous journey’ a passenger flying Delhi-New York on AI will pay 5% GST (for economy) on the full fare, whereas on a Delhi-Dubai-NewYork Emirates flight, the tax will apply to only the DelhiDubai leg, said Sudhakara Reddy , president, Air Passengers Association of India, a consumer rights body.
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