Impact of GST on Indian Aviation

Special Focus

October 31, 2017

/ By

AIBM

October - December 2017



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The newly-introduced Goods and Services Tax (GST) has also impacted the burgeoning Indian aviation sector, though without much damage.

Until a few weeks before the July 1 deadline for the countrywide introduction of the new unified tax regime under Goods and Services Tax, the Indian civil aviation industry had been lobbying hard for exemption or at least delayed imposition of GST. Even the Union Civil Aviation Minister Ashok Gajapathi Raju had asked his cabinet colleague, finance minister, Arun Jaitley, to give airlines in India some more time beyond the July 1 date to prepare themselves for GST.

Even though the extra time was not provided, but on the whole, so far, the aviation sector seems to have gotten away rather lightly. Perhaps the fastest growing sector of the Indian economy for the last two years, the civil aviation industry in India can breathe a sigh of relief as no ‘punitive’ taxes have been imposed under GST, even though aviation still caters to the crème de la crème of the Indian society, with less than 3-4 pc of the Indian population able to afford to fly.

Hence, while several other ‘luxury’ items have attracted an additional tax, with the top cumulative rate exceeding 30 pc for luxury cars, the air tickets have been taxed rather lightly.

Under GST regime, the applicable tax rate on passenger tickets for economy class has been reduced from 6 pc to 5 pc, which is non-creditable for goods. However, tax rate for business and first class has been increased from nine pc to 12 pc, with input tax creditable for both goods and services procured by airlines. With regard to the Ude Desh ka Aam Nagrik scheme (UDAN) that is meant to encourage more Indians to fly, the applicable tax would also be 5 pc, which is non-creditable for goods on value of the passenger ticket excluding subsidies provided by central government and state governments.

Moreover, since the maximum airfare or cap prescribed for the Regional Connectivity Scheme (RCS) seats is inclusive of the applicable GST and the same is reimbursable to the concerned airline operators at actuals from the Regional Connectivity Fund, there would be no impact on fares charged from passengers booked on RCS seats.

With a view to reduce overall tax burden on consumers, the GST regime amalgamates a large number of Central and State taxes into a single tax and allows set-off of prior stage taxes, thereby mitigating the ill-effects of cascading taxes on prices across all sectors including civil aviation.

The Ministry of Civil Aviation has set up a Facilitation Cell (GST-FC) to provide guidance to all stakeholders in civil aviation sector in consultation with relevant GST Sectoral Groups to enable smooth implementation of GST.

According to Investment Information Credit Rating Agency Ltd. (ICRA), the lowering of tax rate on economy class travel is in line with the focus of the Ministry of Civil Aviation to make flying affordable for the masses. Furthermore, under GST, while airlines can claim input tax credit on all inputs which refers to all goods purchases, and includes among others, purchase of spare parts, food items but excludes aviation turbine fuel (ATF) since it is not under the purview of GST on the business class; for economy class they can claim input tax credit only on input services. This is against the current service tax regime, wherein airlines can claim CENVAT(Central VAT) credit on all inputs (excluding ATF) for both economy and business class.

According to Kinjal Shah, AVP and Co Head, Corporate Sector Ratings, ICRA Limited, “With airlines generating a major portion of their revenues from economy class, disallowance of input tax credit on inputs (excluding services) for economy class would result in an additional cost to the airlines. In the current scenario of pressure on yields due to increasing capacities and competitive intensity, the ability of the airlines to pass on the increased cost to the customers too will be restricted.”

Not in this together?

The Federation of Indian Airlines (FIA), an association of private airlines, has written to ministries of finance and civil aviation seeking tax exemption on aircraft parts imported after servicing. Domestic airlines have sought tax exemption on import and servicing of aircraft parts. FIA has cited high tax rate on servicing parts as the major reason, stating that the import of these parts has put a huge financial burden on the companies. Sources in a private Indian carrier said that the burden of increased taxes on the industry under GST could be as high as INR 47.5 billion every year, .

The FIA, in its submissions before the government, maintained that till June 30, no taxes were levied on re-import of aircraft parts and engines after servicing them abroad. Additionally, import of aircraft parts will also be subjected to GST up to 28 pc, according to the airlines lobby, hence requesting that such imports be exempted from taxes.

The FIA said, “In light of the above difficulties, it is humbly prayed that an exemption be granted on the IGST paid on the parts of aircraft imported after repair/ servicing.” Following its submissions before the government, the FIA hopes its concerns would be taken up by GST Council, the highest decision-making authority in the new tax regime. An airline executive told a daily, “If 18 pc tax is levied on each engine under GST, it would be additional burden of thousands of crores (billions) for the airline industry. This would wipe out the profitability of the industry.”

Similar concerns have been raised previously by the airline industry about GST’s impact on imposition of taxes on aircrafts being imported and then leased, but the government had satisfactorily resolved the issue.

Impact on cargo

The PHD Chamber of Commerce and Industry, an apex organisation covering 12 states of the country stated, “At a time when the domestic civil aviation industry anticipates that India will be among the ten largest international freight markets by 2018, with domestic Indian air cargo increasing by 7.3 pc as per estimates over the year 2016, subjecting international freight to 18 pc GST is totally unfair as it will stifle growth of air cargo.”

Echoing similar sentiments, the Express Industry Council of India (EICI represents a cross-section of members drawn from international and domestic express companies) has said that while the GST has reduced logistics costs, its members were concerned about the requirement of e-waybills for the movement of goods. This, according to EICI’s Chief Operating Officer Vijay Kumar would not only reduce savings, but also increase logistics costs and delays.

The e-waybill proposed by the government demands a transporter to log into the GST network and generate an e-waybill providing a vehicle number from the time a shipment is picked up. Every time a vehicle is changed, e-waybills have to be generated until the shipment is delivered to the consignee. On average, a delivery cycle necessitates transshipment at least three to four times. So, instead of reducing paperwork, it would increase it manifold.

Such extensive paperwork could indeed severely hamper business and industry professionals hope that the government would see reason and remove the bothersome red-tape on transport of goods.

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