Airlines in the country will be worse off under the GST regime. That’s primarily because aviation turbine fuel (ATF), the major cost incurred by airlines, is outside the GST ambit. So, ATF will continue to be subject to current indirect taxes and credit will not be allowed on these taxes under the GST regime.

Essentially, from July 1, airlines will be subject to dual tax structures — the current one on ATF and GST for other items — that will not talk to each other.

Since this will increase costs, the government has fixed the GST rate on economy class air tickets at 5 per cent, lower than the current service tax incidence of 6 per cent. But this will offset the higher costs only partially.

Also, it does not help that for air travel other than economy class (that is, for higher classes), the GST rate at 12 per cent is higher than the current service tax of 9 per cent.

Then, there is the problem of truncated input tax credit under GST on economy class air travel, the mainstay of airline revenues. Currently, full input tax credit is available on all air travel. But under GST, for economy class travel, it will be available only on input services.

For travel in the higher classes, though, full input tax credit will continue.

Net-net, airlines’ tax burden will rise under GST. Airlines could find it difficult to pass this on to fliers, given the intense competition and capacity additions that have been putting pressure on fares.

This could mean financial burden, especially for low-cost carriers such as IndiGo, SpiceJet and GoAir that primarily sell economy seats. Jet Airways, Air India and Vistara that also offer higher class seats may be able to pass on higher costs to such passengers, as these categories are not as price-sensitive. But if the cost hikes are not passed on, the burden will worsen.

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