Service Tax - Airline Industry

Service Tax on Airlines (Transport of passengers by air service) – An analysis

Introduction –

The Indian airline industry has come a long way from its humble beginnings. In 1932, when Mr. J.R.D. Tata first flew a small single engined Puss Moth aircraft from Karachi to Bombay, few would have visualized the heights it has reached today. However, the airline industry is still ailed by various factors such as rising prices of ATF (Aviation Turbine Fuel), low utilization of first and business class seats, overcapacity due to higher investment and low demand, cut-throat competition resulting in lower profit margins and other such factors. One of the redeeming factors in an otherwise bleak scenario is the emergence of the Indian economy out of recession.

Mechanism -

Another cause of woe for passenger airlines is the levying of service tax. For the past few years, service tax was being levied on foreign travel by business or first class passengers. From this year’s budget, it has been introduced on air travel by all classes on domestic flights and air travel by economy class on foreign flights. As mentioned earlier, foreign air travel by business/first class was already made taxable from 1-5-2006 onwards.

However, as a conciliatory gesture towards the airline industry, notification no. 26/2010 ST dated 22-6-2010 specifies a maximum ceiling of Rs. 100/-  for domestic air travel and of Rs. 500/- for international air travel by economy class. Thus, effectively, the maximum tax including Education and Secondary and Higher Education Cess would be Rs. 103/- and Rs. 515/-. The proviso to this condition is that this exemption cannot be availed when cenvat credit is taken by the passenger airline. Also, the service tax on business and first class travel still remains as it is and there is no specific exemption granted. The government proposed the extension of the ambit of service tax in the budget 2010 which was notified on 22^nd June, 2010. The service tax levy was introduced from 1^st July, 2010 of this year.

Calculation of gross value -

For the calculation of service tax, the gross value of the ticket will include the base price and fuel surcharge in addition to the congestion fee. Also, YQ and YR charges form a part of the taxable value(Press release dated 24-09-2007). Air travel agents for airlines collect the ticket costs from the passengers. They deduct their commission and remit the balance to the airline. However, this commission cannot be deducted from the value of taxable services since, service tax is payable on the gross value recovered from the customer. Also charges for preponement or postponement of a journey since, they relate to airline services are includible in the gross value.

 However, passenger service fee and airport charges (U.D.F. and A.D.F.) or cancellation charges (for cancelling a journey) will not be included in the gross value.

Exemptions -

In an attempt to encourage travel to the north- eastern states, the government has exempted air travelers from paying tax while embarking on a journey originating or terminating in an airport located in the northeastern states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim or Tripura (“the seven sisters”) or at Bagdogra (West Bengal) (Notification no. 27/2010 ST dated 22-6-2010). Journeys originating in J&K viz., from Srinagar, Jammu and Leh are not covered under the service tax laws.

Certain exemptions are stipulated in notification no. 25/2010 ST dated 22-6-2010 which are :-

i)                    Person who are transitting through India and do not pass immigration or leave the customs areas and continue their journey outside India.

ii)                   Members of the airline staff who are employed on engaged on board the aircraft.

Other general exemptions include those services which are provided to officials belonging to the U.N. or other  International Organisations and to foreign diplomats/consulate officials. Apart from this, in case of services provided to developers of SEZs or a unit of an SEZ, a refund can be obtained by way of refund of tax effective from 3-3-2009 onwards.

International Impact –

Though, the impact of the tax is minimal due to the tax exemptions available, the International Air Transport Association (IATA), has protested against the levy. In September, the Director General & CEO, Mr. Bisignani stated that the levy is a contravention of the International Civil Aviation Organisation (ICAO) rules determined at the Chicago convention and accepted by the Ministry of Civil Aviation. Apart from this levy, there are other taxable services which are related to the airline industry and impact costs. The other services include those provided by Air travel agents (discussed separately), transport of goods by air as well as repairs and maintenance charges payable for aircraft servicing all of which are covered under the service tax net.

Conclusion –

While, the government has targeted 1,600/- annually on account of the service tax, it is still the general public who will be bearing the cost of this levy. Way back in the 1970s and 1980s, the government had levied Foreign Travel Tax and Inland Travel Tax on passengers travelling by air. Strangely, It is almost as if history is repeating itself. However, with the effort of the government to include more and more services within the tax net, this appears to be the next step towards a comprehensive GST regime.

Another area of concern appears to be the” difference of opinion” between the IATA, the Ministry of Civil Aviation and the Finance Ministry. Until the matter is sorted out, there will only be at best a half hearted approach of all the parties involved. Ultimately, it is the passenger who will pay the price whereas the finance ministry will be “flying high”.