GST lowers economy class tax to 5% but raises business class to 12%. This change aims to boost budget travel while allowing airlines Input Tax Credit.
The GST Council recently published new Goods and Services Tax rates for various goods and services, categorized into 5%, 12%, 18%, and 28% slabs. The civil aviation sector, a significant and expanding part of the Indian economy, is one such service greatly impacted. This article explores how the transition to GST influences the growth of the aviation industry and the resulting changes in air travel expenses.
Previous and Current Tax Regimes
Historically, Service Tax applied to both economy and business class flight reservations. Under the Service Tax system, economy class tickets were taxed at 5.6%, while business class tickets incurred an 8.4% rate.
| Tickets | Rate of Service Tax |
|---|---|
| Economy Class | 5.6% |
| Business Class | 8.4% |
With the introduction of GST from July 1, 2017, the GST Council reduced the tax for economy class flights to 5%. Conversely, business class tickets now face a higher GST rate of 12%. This adjustment creates a new tax structure.
| Tickets | Rate of GST |
|---|---|
| Economy Class | 5% |
| Business Class | 12% |
Airfare Comparison: Pre and Post GST
Domestic air travel is expected to benefit from GST implementation, leading to reduced airfare costs. This change is good news for budget-conscious travelers planning future trips. The subsequent tables illustrate the price variations.
Economy Class Fare under both pre-GST and GST regimes-
| Fare/Charge | Amount under Service Tax | Amount under GST |
|---|---|---|
| Base Fare | 2,000 | 2,000 |
| Airline Fuel Charge | 700 | 700 |
| CUTE Charte | 50 | 50 |
| Passenger service fee | 239 | 239 |
| User development fee | 150 | 150 |
| Airline Service Tax @5.6%/@5% | 154 | 137.5 |
| Other Surcharge | 12 | 12 |
| Total fare | 3,305 | 3,288.5 |
Conversely, business class fares have increased marginally, rising from an approximate 9% service tax to a 12% GST rate. This minor price adjustment is unlikely to dissuade business travelers from their planned journeys.
Business Class Fare under both pre-GST and GST regimes-
| Fare/Charge | Amount under Service Tax | Amount under GST |
|---|---|---|
| Base Fare | 8,000 | 8,000 |
| Airline Fuel Charge | 2,800 | 2,800 |
| CUTE Charte | 200 | 200 |
| Passenger service fee | 700 | 700 |
| User development fee | 400 | 400 |
| Airline Service Tax @8.4%/@12% | 1,015.4 | 1,320 |
| Other Surcharge | 100 | 100 |
| Total fare | 13,216.4 | 13,520 |
Frequent flyers may appreciate the updated tax rates and ticket prices resulting from GST. The decreased tax burden is advantageous for budget-friendly domestic airlines. Nevertheless, it is uncertain whether airlines will transfer these reduced tax benefits to consumers. A significant part of airline revenue comes from economy class passengers. Additionally, airlines can only claim Input Tax Credit (ITC) on input services for economy class travel. For business class, ITC can be claimed for items like spare parts, food, and other inputs, excluding fuel.
