Input tax credit on ATF: Aviation Ministry suggests ways to compensate airlines

“GST is becoming a reality but India is a federal structure. So generally, GST means, they (corporates) would get set-offs for their inputs. Now here in this federal structure, state governments wants petroleum products to be kept out of it. That generates one type of problem because petroleum and intoxicants, state governments want that out (of GST). Ok, keep that out but then how do they get the set-off, that becomes a double whammy,” Raju said.

“The issue has to be identified, flagged and the ministry has flagged it with the finance ministry. They have to take a call on it, what to do, how to go about it. Anywhere between 40-45 per cent of the operating costs are fuel. If fuel is high taxed and that too with no set offs, they will be in trouble,” the minister said.

When asked about specific suggestion that have been made, Raju said: “What alternatives could emerge have been suggested, but unless a final decision is arrived at, I should not be talking about it.” Sources said the government may keep GST rate on passenger travel on the lower side to help compensate for the unavailability of input tax credit.

Apart from issues related to ATF, industry expects GST to increase tax rates in the aviation sector as higher especially for the economy class air travel. In Budget 2016-17, the government has raised excise duty on ATF to 14 per cent from 8 per cent, though ATF for supply to aircraft under the proposed Regional Connectivity Scheme was kept at 8 per cent.

Currently, the Centre and states levy taxes on ATF including excise duty and value added tax. A service tax of 6 per cent is levied by airlines for economy air travel and 9 per cent for non-economy air travel. Ticketing systems under the proposed GST regime will also need to be realigned as every journey across states or countries will be treated as a separate journey and GST will be levied at the point of embarkation. This is in variance with the present tax arrangement where a return journey is treated as one journey irrespective of stopovers. Also, if the point of embarkation for a return journey is outside India, then it does not attract service tax.

The GST Council had agreed on a higher tax rate of 18 per cent for services under the indirect tax regime, while some essential services are proposed to be taxed at 6 per cent or 12 per cent, though the complete structure is yet to be finalised. This is likely to lead to an increase in the ticket cost and there won’t be any set-off available in form of input tax credit as ATF will be out of GST ambit. “The implementation of GST could possibly also result in higher upfront costs for aircraft and leases, spares and parts, and distribution costs, increasing cash flow requirements, although airlines may receive input tax credits later,” Centre for Asia Pacific Aviation said in its India Aviation Outlook for 2017-18.