As we know VAT (Value Added tax) was introduced (in the year 2005) in most of the states in India with the prime motive of removing cascading effect (i.e to reduce tax on tax).
However the motive of avoiding cascading effect could not be fully achieved fully as state taxes (like VAT) were not available for set off against Central taxes (like Excise duty, service tax etc) and vice versa.
In order to achieve the objective of avoiding cascading effect (i.e tax on tax) and other allied objectives GST has been introduced w.e.f 01.07.2017.
All the industries have been impacted by the implementation of GST. Among these aviation industry has also been hugely impacted.
The calculation of GST has following basic format:
| Particulars | Am Rs |
| Output GST | XXXX |
| Less: Input Tax Credit | XX |
| Net GST payable | XXX |
As can be seen from above format, Input Tax Credit plays a vital role in determining total tax payable (in cash) and helps to reduce cascading effect.
Let’s examine the impact of taxes on Airline Industry before and after the implementation of GST w.r.t passenger transport.
| Particulars | Prior to 01.07.2017 | w.e.f 01.07.2017 |
| Applicable Taxes | Service Tax Economy Class @ 6% Business Class @ 9% |
GST Economy Class @ 5% Business Class @ 12% |
| ITC (Input Tax Credit) on ATF (Fuel) | Excise duty paid on ATF could be set off against output Service Tax liability. However VAT on ATF was not available for set off against any output Tax. | No ITC available (for Excise Duty and VAT) since ATF falls outside GST |
| ITC (Input Tax Credit) on Input Services | Service tax paid on Input services was available as CENVAT credit (i.e ITC) against output Service Tax liability | ITC Available against economy as well as Business Class output GST liability i.e GST paid on availing input services can be set off against output GST. |
| ITC (Input Tax Credit) on Input Goods | Excise duty and CVD (countervailing Duty) paid on input goods (like spare parts etc) could be set off against output Service Tax liability. However VAT paid on such input goods was not available for set off since aviation industry is primarily providing services. |
ITC of GST paid on Input Goods is available for set off against Business Class output GST liability only i.e ITC not to be set off against Economy class output GST liability. |
| ITC (Input Tax Credit) on Capital Goods | Excise duty and CVD (countervailing Duty) paid on capital goods could be set off against output Service Tax liability. However VAT paid on such Capital goods was not available for set off since aviation industry is primarily providing services. | ITC of GST paid on Capital goods is available for set off against Business Class output GST liability only i.e ITC not to be set off against Economy class output GST liability. |
As can be seen from above table the rate of tax on economy class has been reduced from 6% to 5% (with ITC on input services), whereas in case of business class the same has been increased from 9% to 12% (with full ITC).
The major disadvantage is in form of non-availability of Input Tax Credit (previously CENVAT) on ATF (Aviation Turbine Fuel) which consist of around 70% of the operating cost of Airlines Industry.
In addition to above ITC (input tax credit) was previously available for Central taxes (i.e Excise and CVD) for input goods as well as capital goods against the output service tax liability for both economy and business class.
But after GST, ITC (input tax credit) on input goods and capital goods has been restricted against output GST of Business class (i.e no ITC available against output GST of Economy class).
It may be noted that most of the Airlines company has very few business class seats and in many airlines (like Indigo and Spice jet) they do not have business class tickets.
So we can conclude that there is no much impact as far as output tax on passenger fare is concerned. However there is major impact on Input Tax Credit methodology and cascading effect (i.e tax on tax) is not getting fully addressed in this case.
Impact on OMC (Oil Marketing Companies) supplying ATF (Aviation Turbine Fuel) to Airlines
Prior to 01.07.2017, Airline companies were in position to claim CENVAT of excise duty on ATF supplied by oil marketing companies (like IOCL, BPCL, HPCL, Reliance etc). In such cases OMCs were taking dealer registration under excise for their depot in and around Airports and were supplying Rule 11(7) invoices (also known as RG23D invoice) to Airlines companies. On the basis of such RG23D invoices Airline companies were claiming CENVAT credit.
W.e.f 01.07.2017, ATF is out of GST and since airline companies are required to pay GST, so Airline companies are not in position to take CENVAT credit on ATF. So now OMCs are not required to provide RG23D invoices to Airline companies and they can supply ATF through commercial invoices.
Since OMCs are not required to issue RG23D invoices, so they can now either surrender their excise registration taken for their depot in and around airport area or can file nil return.
This will save the time and cost involved in maintenance of RG23D register.
It may be noted that above view given by the author is advisory in nature and concerned person should take care before acting upon the above view.
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