Recently, the GST Council announced the rates of Goods and Services Tax applicable on the supply of various goods and services. These rates are distributed across different rate bands of 5%, 12%, 18% and 28%.
One such service which is extensively used and is one of the booming sectors of the Indian economy is civil aviation. Over the last few years the civil aviation industry has witnessed exponential growth under the VAT and Service Tax regime. How will the shift to GST affect the growth of the burgeoning civil aviation sector and what will be the effect of GST on air fares?
Current Taxation vs. New Regime
The Services Tax is applicable on all bookings made; be it for the economy class or for business class. Tax rate under the VAT regime is:
Under the new regime, the GST Council has lowered the tax rate for economy class flight tickets to 5%. However, the business class tickets will attract a higher tax at 12% after GST implementation from 1 July. Thus, the revised scenario will be:
A Comparison of Prices - Pre and Post GST
Domestic air travel is clearly going to see a boost post GST with air prices reducing. Budget travellers, therefore, have a reason to cheer and plan for the upcoming holidays. The difference can be seen in the table below :
On the other hand the business class fares are going to cost higher, however, it is only a marginal increase from 9% to 12%. This slight increase in travel prices is probably not enough to deter business travellers from their travel plans.
If you are a frequent flier, you will find the impact of GST on air fares and the new tax rates and ticket prices to your liking. The reduction in tax rate is positive for low-cost domestic carriers. However, it remains to be seen if the airlines will be willing to pass on the benefits of the reduced tax rate to customers. A major portion of the revenue generated from airlines comes from economy travellers. Moreover, airlines can only claim ITC on input services for the economy class while for the business class they can claim ITC for spare parts, food items and other inputs, apart from fuel.