Travelling by air will be costlier with the government increasing the service tax rate and withdrawing the exemption earlier provided on the construction of new airports.
Business class fares will go up 3.3 per cent with Finance Minister Arun Jaitley announcing a reduction in the abatement of service tax on business class and first class fares from 60 per cent to 40 per cent. Service tax would now be payable on 60 per cent of the fare for business class.
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This is in addition to the increase in tax rate from 12.36 per cent to 14 per cent. The higher tax rate will increase economy class fares, too, by 0.6 per cent.
According to a rough estimate, the increase in business class fare would be little more than Rs 1000 on an average fares between Mumbai and Delhi, an airline executive said.
All the three full service airlines - Air India, Jet Airways and Vistara - offer business class seating on domestic flights.
The government has also withdrawn service tax exemption provided to the construction of new airports. This will make construction of new airports at Navi Mumbai and Goa more expensive.
"With the exemption withdrawn, developers would have to pay tax on consultancy, technical services or hiring labour from contractors. This could push up the construction costs by as much as four per cent and lead to increase in tariffs," said a senior executive of a private company engaged in airport development. Mopa (Goa), Navi Mumbai, Shirdi and Sindhudurg as among the airports that will be developed as new facilities.
"Airport and related construction expense is expected to be around Rs 20,000 crore over the next five years. The service component could be around Rs 10,000 crore and 14 per cent service tax means around Rs 1,400 crore over the next five years. All this will add to the airport charges to be levied on passengers. Indian aviation is suffering from high operating costs and over-taxation. It just became a tad worse," said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.
On a positive note, Air India will receive Rs 2,500 crore of equity infusion this year. The national carrier had asked for infusion of over Rs 4,200 crore. The airline will use the funds largely for its loan repayments.
The government has also decided to extend the visa-on-arrival scheme applicable to 43 countries to 150 countries in a phased manner.