Aviation is one of the booming sectors in Indian economy which is widely used by local as well as the international population of the world. The Indian government has taken several measures such as liberalisation and infrastructure development to make the traveling simpler, safer and more convenient. It is, however, assumed that the introduction of new tax regimen, GST (Goods and Service Tax), from the first day of July 2017 will have positive as well as negative impacts on the aviation industry. Though GST will greatly simplify the confusion of multiple taxes and the hassles that are faced due to the indirect taxes imposed by Central and State Government, it will affect the airfares and various other domains related to the aviation sector.
Let’s glean through the positive and negative impacts of GST on the aviation sector.
According to the current tax regime, the tax rate for the economy and business class is six and nine percent respectively. After the introduction of GST, the tax rate on business class airfares will be increased up to twelve percent, whereas, the fares for the economy class will be reduced up to five percent. These ups and downs in the airfares will bring considerable change for the population of India traveling across the globe.
As per the current taxation norms, the carriers are required to be registered once for the service tax. However, after the implementation of GST, the registration of the carriers in each state will be mandated including the flight origination point, halts, and the location where the registered passenger is located. The entire process will result in higher paperwork and compliance cost. In addition, the details and the invoice of the supplies made for registered individuals need to be uploaded to the online GST network by the carriers.
Maintenance, repair, and overhaul (MRO) are considered as goods and services by the Indian Government, and therefore, VAT and service tax are applicable on it. That’s the reasons the aviation industry has to face the higher tax burden for the MRO. It is, however, assumed that the implementation of GST will reduce the cascading effect of taxes by considering the MRO services as “pure service transactions”. If the aircraft uses the maintenance and repair services by overseas or Indian service providers, GST will be levied on it irrespective of the place of performance of these services.
According to the current tax abatements, it depends on carriers whether they want to avail the credit of ATF or not. However, it will not be the case after the implementation of GST. The Aviation Turbine Fuel (ATF) is expected to be excluded from GST, the new tax regimen of India. This means the Central and State governments will continue to levy the Excise duty and Value Added Tax (VAT) on ATF which will more likely result in the cascading effect of taxes.
The leasing of aircraft in India is currently a subject to VAT which is one of the reasons the carriers perform the leasing activities outside the country. The GST model of taxation considers the aircraft leasing as a service. Therefore, irrespective of the leasing location, the carriers have to pay around eighteen percent GST. The figure may vary according to the leasing contract. This way the Indian government will be able to block the significant cash flow for the carriers.
The current tax regime imposes a service tax on both outgoing and incoming international flights fare. The tax is only levied if the air travel commences in India. However, the GST will be imposed on the customer's registered under the GST irrespective of the air travel they are commencing be it outgoing or incoming. If the customers are not registered under the GST, the return journey will be free from taxation.
Whether you are a frequent flyer, running an aviation industry or a stakeholder, everyone will be affected by the new taxation system of India. GST will bring a significant amount of change in the aviation sector and the other competitive sectors as well. There will be some positive and negative impacts that the different industries might be facing in the upcoming days. Though GST will boost the MRO sector of the aviation industry, increased cost of ATF will, unfortunately, result in the cascading effect of taxes and increased airfares. All we need to do is cross our fingers and hope for the best outcome after the implementation of GST.
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