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Airline Cos may Push up Fares to Lighten GST Load

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Industry anticipates fares may rise to offset higher cost of ops under new levy

The Goods and Services Tax (GST) may not provide a tailwind to India's aviation industry, which anticipates fares could increase to help offset the rising cost of operations under the new levy.

“Under GST, airlines will be taxed for importing spares for their use and on aircraft lease rentals, and these are not being taxed in the current regime. Any new tax on the aviation industry, which operates under thin margins, may drive fares higher,“ said a senior airline executive, who did not want to be identified.

Carriers are concerned that not only the potential increase in tax incidence, but also likely reductions in input tax credits on revenues earned through economy class seats could reduce operating flexibility.

“Regarding input tax credits (ITC), the lower rate of 5% on economy class travel comes with restrictions, whereby ITCs can be claimed on input services. ITCs are not claimable on the purchase of good or stock transfer,“ Alexandre de Juniac, director general of global industry grouping IATA, wrote in a letter to finance minister Arun Jaitley.

“For premium travel (IGST rate of 12%), full ITC reclaim is available on both input goods and services. Our Indian-based members are concerned that the ITC restriction associated with the economy class may favour foreign carriers over do mestic carriers as the former tend to sell a larger portion of premium class travel. It is requested that full ITC reclaim ability also apply on economy class travel.“ This clause may further dent the revenues of no-frills carriers such as SpiceJet, IndiGo and GoAir, which largely sell economy class seats.

The new tax regime will also make direct flights to key international destinations more expensive, compared with stopover flights via hubs of international carriers, as GST is to be charged on the first leg of the flight. “The first leg of the flight may be Delhi-Dubai for a passenger flying to the US via Dubai, but an Indian airline like Air India that flies directly to the US has to charge GST for the full ticket until the US, making it expensive for the passenger booking a direct flight, thus, making it difficult for Indian carriers,“ said another airline executive, who did not want to be identified.

The aviation ministry had asked the airline industry in April to share its concerns on GST. “We have forwarded all these concerns to the finance ministry, said an aviation ministry official.

The Economic Times New Delhi, 13th June 2017

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