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Air travel gets expensive with service tax changes

Business class fares will go up 3.3% and first class fares from 60-40%

Aneesh Phadnis  |  Mumbai 

Air travel will be costlier with the government increasing the service tax rate and withdrawing service tax exemption for construction of greenfield airports.

Business class fares will go up 3.3% with finance minister Arun Jaitley announcing a reduction in abatement in service tax on business class and first class fares from 60% to 40%. Consequently, service tax would be payable on 60% of the value of fare for business clas

This is in addition to increase in tax rate from 12.36% to 14%. The change is tax rate will impact economy class fares too which would go up by 0.6%.

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As per a rough estimate the increase in business class fare would be little than Rs 1000 on an average business class fare 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The government has also withdrawn service tax exemption provided to the construction of greenfield airports.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" With the exemption withdrawn developers would have to pay tax on consultancy, technical services or hiring of labour from contractors. This could push up the construction costs by as much as 4% and lead to increase in tariffs," remarked a senior executive from a private company engaged in airport development.

Mopa (Goa), Navi Mumbai, Shirdi and Sindhudurg as among the airports that will be developed as greenfield facilities.

"Airport and related construction is expected to be around Rs 20,000 crore over the next 5 yrs. Service component could be say around worth Rs 10,000 crore and 14% service tax means around 1400 crore over next 5 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.

First Published: Sun, March 01 2015. 18:29 IST