Aircraft lease costs to rise on GST levy

Aircraft leasing costs will go up with the introduction of five per cent levy under the goods and service tax (GST).

 

At present, cross-border aircraft leases carried out by scheduled airlines are not subject to Customs duty, central excise and value-added tax (VAT).

 

Among domestic airlines, IndiGo has the largest capacity induction plan. The airline, which ended FY17 with 131 planes, plans to induct 39 aircraft 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 input credit against tax liability on sale of tickets and cargo space," said a senior executive from Air India. The national carrier pays monthly lease rent of around $350,000 for its narrow-body Airbus planes and around $1 million for its wide body Boeing 787 aircraft.

 

The government has fixed GST rate of five 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 one-two 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 to offset tax liability for 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 the government does mention that legal vetting is pending and I hope that this error is rectified when the final announcement is made," said Anita Rastogi, partner-Indirect Tax, PwC.