Abolition of Service Tax on Air Tickets proposed by Aviation Ministry

Abolition of service tax from air ticketAs per The Economic Times: The aviation ministry has called for abolition of service tax on air tickets and reduction in sales tax on aviation fuel from an average 25% to a uniform 4%, proposals that may not only nurse bleeding carriers back to profits, but also rein in soaring fares.

In a consultation paper released on 31-05-2012, the ministry said the policy changes would bring in economic benefits to the tune of 45,000 crore, far outweighing the revenue loss to the exchequer, which is estimated at 3,750 crore.

The proposals are part of a larger action plan being drawn to develop India as an aviation hub. The ministry will discuss the plan with the Prime Minister’s Office on Monday.

“The total operational losses of all the (Indian) airlines for 2008-09, 2009-10 and 2010-11 are approximately 19,000 crore,” Civil Aviation Minister Ajit Singh had told Parliament last month. He said 10,000 crore of losses were anticipated in 2011-12 alone. The minister said all domestic carriers, except IndiGo, were making losses.

The ministry has argued that knocking off service tax on air tickets would make them cheaper by at least 10%, providing relief to travelers stung by the dramatic rise in ticket costs in recent months.

Airfares on major domestic and international routes have shot up 30-50% during April-May mainly because of the pilots’ strike at Air India and the uncertainty surrounding Kingfisher Airlines. The International Air Transport Association, a lobby group of airlines, has welcomed the ministry’s initiative.

“Aviation supports 1.7 million Indian jobs and contributes 0.5% to the country’s GDP,” said Amitabh Khosla, IATA’s country director for India. “It has the potential do much more for the economy if the government would successfully deliver on the long-standing issues of taxation that are destroying the competitiveness of Indian airlines.”

Experts believe that India’s unique geographical location, tourism and trade potential offer the country a great opportunity to become a global aviation hub, but unimaginative policies have allowed other aviation centres such as West Asia and South-East Asia to flourish at India’s expense.

“An aviation hub’s direct and indirect impact on employment creation, growth of commerce and government revenues is still not well appreciated,” said Amber Dubey, partner and head (aviation) at global consultancy firm KPMG. “The need of the hour is to abolish all taxes like excise, import duties, sales tax and service tax on aviation for a period of 10 years.”

Aviation turbine fuel accounts for 40% of Indian carriers’ costs as against the global average of 20%, thanks to state governments levying sales taxes as high as 30%. Although states like Punjab have recently reduced the ATF tax rate to 4%, fuel sales levies remain high in Maharashtra and Delhi that host the largest air traffic.

The ministry is pushing for a ‘declared’ goods status for ATF under the Central Sales Tax Act to ensure that states charge a uniform 4% sales tax on the fuel. Officials in the aviation ministry say this move alone could trigger a 6% drop in airfares, boost the international and inter-continental traffic revenues of airlines by 32,000-42,000 crore, and generate 30,000 new jobs. They say this would offset the 1,500-crore revenue loss to state governments.

The levy of 12.36% service tax on air travel has hampered traffic growth and dented aviation sector profits, the ministry’s consultation paper said. Khosla of IATA said the service tax on air tickets and services that airlines purchase contravenes global norms. “The equally unique tax burden on ATF is even more damaging.

This is not only destroying the competitiveness of Indian airlines but also resulting in lost opportunities for jobs and growth in the broader economy,” he said. Introduced in the 2010-11 Budget, the government had hoped to raise 1,200 crore from the tax. But the government is making “roughly two times more than what it had envisaged”, the aviation ministry said.

Service tax accounts for an average 4% of an air ticket cost. The ministries reckons a 4% drop in airfares could lead to additional traffic revenues of 1,200 – 2,300 crore, and generate 12,000-18,000 new jobs with economic gains of as much as 600 crore. Airlines like Air India and Kingfisher owe the exchequer service tax dues over 500 crore and have been struggling to clear their other mandatory tax liabilities as well.

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