GST impact on air travel to be marginal, says ICRA

Disallowance of input tax credit on inputs (excluding services) for economy class, finalised in the goods and services tax (GST), is likely to put pressure on airlines, ICRA today said.

"With airlines generating a major portion of their revenues from economy class, disallowance of input tax credit on inputs (excluding services) for economy class will result in an additional cost to them," said ICRA AVP and Co-Head, Corporate Sector Ratings, Kinjal Shah.

In the current scenario of pressure on yields due to increasing capacities and competitive intensity, the ability of airlines to pass on the increased cost to customers, too, will be restricted, she added.

Under GST, ICRA explained that airlines can claim input tax credit on all inputs (refers to all goods purchases and includes among others food items, etc, but excludes aviation turbine fuel (ATF) since it is not under the purview of GST) on the business class, but for the economy class they can claim input tax credit only on input services.

This is as against the current service tax regime, where airlines can claim cenvat credit on all inputs (excluding ATF) for both economy and business classes.

Further, ICRA said GST on the economy class air travel has been finalised at 5 per cent, which is 100 bps lower than the existing service tax rate.

However, GST on business class air travel has been announced to be 12 per cent, which is 3 per cent more than the existing service tax rate.

In ICRA's view, these rates changes are not material, and will not have any major impact – positive or negative – on the air passenger growth.

However, the lowering of tax rate on economy class travel is in line with the focus of the civil aviation ministry to make flying affordable for the masses, the rating outfit added.