Economy class air travel to attract 5% GST; business class 12%

Air travel currently attracts tax rate of 6% and 9% for economy and non-economy travel respectively

The growing aviation sector of India will get a boost once Goods and Service Tax (GST) is implemented as the tax rate on air travel would be 5 per cent, Finance Minister Arun Jaitley said on Friday.

This is lower than the prevailing rate as currently air travel attracts tax rate of 6 per cent and 9 per cent for economy and non-economy travel respectively.

“Considering that it is an essential mode of transport, taxation on airline services and railways has been kept at the minimum bracket of 5 per cent,” Jaitley said in a press conference in Srinagar. 

The components of service sector were broadly divided into four brackets of 5 per cent, 12 per cent, 18 per cent and 28 per cent.

Another reason for keeping taxation rate on transport services in the lower bracket is because unlike other sectors the players in this sector will not get input credit on taxes. This is due to petroleum (aviation turbine fuel) for airlines being kept out the GST regime.

Civil Aviation Minister Ashok Gajapathi Raju earlier wrote to the finance ministry suggesting ways to compensate airlines that will not be able to take input tax credit on aviation turbine fuel under GST.

Experts believe that it is a huge relief for the sector as a higher tax would have led to a sharp rise in ticket prices leading to the high growth to come down. 

“Had the tax rate been increased, airlines would have invariably passed on to the passenger leading to higher ticket prices. This will not happen now,” said an airline executive.

Low ticket prices has helped India to become the third largest market in the world in 2016 in terms of domestic travel, surpassing Japan according to aviation consultancy firm CAPA. 

India’s domestic air passenger traffic stood at 100 million in 2016 and was behind only the US (719 million) and China (436 million).

The aviation industry was concerned over the draft model law that was unveiled in 2016 which proposed a tax rate of 18 percent.

Under the current indirect tax regime, the industry has to pay only about Rs 3,600 crore every year, according to industry estimates, while its annual revenue is pegged at Rs 60,000 crore. 

A tax rate of 18 per cent would have led to an additional tax burden of up to Rs 15,000 crore annually.