Aircraft lease costs to rise on 5% GST levy

At present cross border aircraft leases don't suffer customs duty, central excise and VAT

Aircraft leasing costs will go up with introduction of five per cent levy under the Goods and Service Tax.

At present cross border aircraft leases carried out by scheduled airlines are not subject to customs duty, central excise and VAT.

Among domestic airlines IndiGo has the largest capacity induction plan. IndiGo, which ended FY17 with 131 aircraft, plans to induct 39 planes in FY18. Other airlines including AirAsia, GoAir, SpiceJet and Vistara have inductions this year.

"We had sought for continuation of tax exemption. The impact will be largely related to cash flows as we will be able to claim an input credit against tax liability on sale of tickets and cargo space," said a senior executive from Air India. Air India pays a lease rent of around $350,000 for its narrow-body Airbus planes and around $1 million for its wide body Boeing 787 planes.

The government has fixed GST rate of 5 per cent for economy class travel and 12 per cent for business class travel. "We expect high growth rate in domestic traffic to continue in the near term with further upside once the GST impact on the economy is visible in 1-2 years, " said Kapil Kaul, South Asia CEO of aviation consultancy, CAPA.

Airlines can use inputs credits to offset the tax liability on sale of tickets.  While  input credits arising from procurement of both goods and services can be used in case of business class, input credits from services alone can be used for offseting tax liability in respect of economy class travel.

"I perceive that there has been an inadvertent error . Ideally for economy class also full credits should have been allowed. The schedule recently published by government does mention that legal vetting is pending and I hope that this error is rectified when final announcement is made," said Anita Rastogi, partner-Indirect Tax, PwC.