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GST to negatively impact Air Travel

How will GST impact the Indian Aviation industry  which is at the moment growing steadily with the introduction of affordable fares and newer sectors. Domestic traffic in the aviation sector has taken a turn for the better. Railway budgets are ever increasing and has been steering people towards flying. Newer players venturing in with great discounts and offers on flying has also added much to the sector.

Let’s take a look at how the impending GST regime will affect the aviation industry.

  • Rate of Tax

Currently, travel by air attracts a service tax @ 6% for economy class and 9% for non-economy travel, ie business or club class. GST changes for aviation has not been announced, however speculations by the Chief Economic Advisor suggests an applicable rate of 17-18%.

Also, as per the Model Law there is no mention of current service tax exemption on flights to/from specified airports in the North East region would continuing underGST.

It must be observed that concessional rate of Service Tax for airlines is subject to carriers not taking Input tax Credit (ITC).  Total input credit is unlikely to exceed 12% (approx. increase in tax rate) particularly because Air Turbine Fuel (ATF), which accounts for almost 35% of airline costs is not included in GST, hence airlines will not be able to avail ITC on fuel costs.

This will plainly affect the growth of the industry as costs likely will go up for all categories of air travel including cargo shipments by air.

  • Applicability of Tax

Presently, any airline ticket attracts service tax if a passenger boards the flight in India for the journey, regardless of stopovers or return journeys which maybe outside of India, for example :

Bangalore – Dubai – Bangalore – entire ticket attracts service tax

Mumbai-Bangalore-Mumbai – entire ticket attracts service tax


Dubai – Bangalore – Dubai – does not attract a service tax

To simplify it further, any flight taking off from any airport in India will be taxed. This will also include International flights. The Model draft now suggests that a journey will now be split or separated by number of stopovers. That is with the above example at hand, the Bangalore – Dubai sector will be taxed with GST in Bangalore. In the domestic leg, Mumbai – Bangalore sector will be taxed at Mumbai and Bangalore – Mumbai leg will be taxed again at Bangalore. This calls for restructuring of the entire ticketing platform.

  • Aviation Turbine Fuel (ATF)

Incidentally, Aviation Turbine Fuel (ATF) is already at 50-60% higher in India when compared to other countries around the world, and Aviation Turbine Fuel constitutes to 35% of overall cost of carriers across India. Currently, ATF is outside the purview of GST, and this will have a major impact on the industry as the increased GST rate combined with the non-inclusion of ATF within the GST net will significantly burden the aviation sector since the carriers will not be able to take credit on Aviation Turbine Fuel. If such an instance occurs, it will be imperative for the carriers to ask for a lower GST on passenger travel.

  • Aircraft lease/ purchase will be taxable

Aircraft carriers around the world work mostly on the lease model, where aircrafts are leased out from various companies. Any lease agreement executed in India is subjected to taxes, to avoid the same, companies carry out these agreements out of India. With the current GST model, any lease carried out within or outside of India still will be taxable. Subsequently, lease rentals along with GST will now require to be paid upfront and realization of this GST will happen over a period of time with the sale of tickets, which in in turn will result in significant cash flow blockages for companies.

  • Maintenance

All MRO( Maintenance, Repair, Overhauling)  activities undertaken in India attract both VAT and Service tax.  Service, Maintenance and Overhauling of aircrafts are currently being done outside of India as it doesn’t attract taxes when done outside the country. However, according to the Model GST services provided by MRO contractors even if its outside the country will attract GST at hands of carriers here in India. This will increase the costs for carriers , but is a welcome move as it removes tax arbitrage and will make the domestic industry more competitive by bringing it at par with foreign contractors in terms of taxation

Spare parts that are imported into India are currently exempt from custom duties. This again is being reconsidered with the introduction of the GST bill.

  • Compliance

Compliance costs are another major concern for the Airline Industry. Presently, airlines are required to take only one service tax registration. The Model GST however prescribes a registration with every state it undertakes business with. This will significantly escalate costs of compliance.

Although, the Aviation industry is awaiting the final verdict of the GST regime with bated breath. We might conclude that flying might become expensive to the consumer, however, we hope that Government may consider the impact on aviation industry and bring ATF within the purview of GST system, thereby making flying more affordable to the common man.

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