Uncertainty persists in turbulent times: Impact of 56th GST Council Meeting on Aviation Industry

While the 56th GST Council meeting promised a wide range of benefits, reduced slabs, rationalized rates and trade facilitation measures,  the complexities looming over the aviation sector appear to be far from addressed. Since the introduction of GST, ambiguities have persisted surrounding multiple issues ranging from taxability of credits received from aircraft manufacturer or engine supplier to taxability of code share arrangements.

In the Council meeting, the GST Council proposed a series of reforms aimed at rate rationalisation. Some key changes included a reduction in GST rates on several goods from 12% to 5% and from 28% to 18% while a majority of services previously taxed at 12% were proposed to be shifted to 18% slab specifically in transportation sector and a new slab of 40% GST has been introduced for luxury items and sin goods. Additionally, the place of supply for intermediary services has been proposed to be shifted from the supplier’s location to that of the recipient.

With the intent of taxing majority of goods and services under two tax rates i.e. 5% and 18%, various commodities/ services under 12% rates have now been moved to either 5% or 18% category. The passenger transportation services, earlier taxed at the rate of 12% with input tax credit (‘ITC’) availability, will now be covered under the 18% bracket with ITC availability. Apparently, the government neither wants to give air transportation a luxury tag nor considers it an economical spend.

A major segment of business class travel pertains to the outbound air transportation services by airlines registered in India. It is to be noted that though the outbound flights are destined to foreign destination, these are taxed as inter-State supply as the place of supply of such services is treated to be the place of embarkation of flight i.e. the State from where passenger embarks the journey. Resultantly, zero rating benefit is not available to outbound flights as one of the criteria to qualify as export i.e. place of supply should be outside India is not met.

In India, the taxation of outbound air transportation services differs significantly from that in other countries including Canada, United Kingdom, Germany and Europe wherein outbound flights to international destination are not taxed. However, India has adopted a tax policy which is distinct from the position in several other countries and imposes GST on outbound air transportation. This policy also diverges from the international norms and protocols set by civil aviation organizations such as International Civil Aviation Organization (ICAO).

In order to bring equivalence amongst Indian airlines and foreign airlines, there was a pressing need to treat such outbound transportation services as zero rated supply. However, no change has been proposed in this context and instead, the Council has chosen to increase the tax rates in business class.

Given that airlines already operate on wafer thin margins, the industry had anticipated a relief in form of zero rating of outbound air transportation services. Contrary to these expectations, the decision to leave GST at 18%  is likely to adversely affect the aviation sector increasing cost pressures and straining profitability further.

Typically, airlines receive certain incentives or non-cash credits from aircraft manufacturers located outside India. In such transactions, the aircraft manufacturer gives credits to airlines being the operator of aircraft even in a case where aircraft is obtained on lease. Moreover, airlines also receive credits for selection of vendors supplying equipment to aircraft manufacturer to be installed in the aircraft.

In such transactions, a common dispute is raised by the department alleging that such credits are taxable being consideration for intermediary services provided by aircraft operator. Therefore, such credits become taxable in the hands of airlines due to place of supply of intermediary services being location of supplier of services i.e., India. Contrary to the same, the airlines were not treating the same as consideration for services but only as incentives.

A significant proposal by the Council is to amend the place of supply of intermediary services, shifting it from the suppliers location to that of the recipient. Consequent to such amendment, the transactions which were currently taxed in India as intermediary services, will now qualify to be export of services.

Until this change takes effect, airlines remain caught in disputes whether certain transactions qualify as intermediary services or export of services. The proposed amendment is expected to resolve much of this present ambiguity persisting in aviation industry.  

Another significant change proposed by the Council is the reduction of GST on flight motion simulator and its parts from 18% to Nil. This decision should be welcomed by the aviation industry, as it is expected to substantially reduce the training costs borne by airlines. Given that, carriers in India operate on very thin margins, lowering such overheads provides crucial relief at a time when industry is struggling with rising fuel prices, high operational costs and competitive pressures. By making simulators tax free, the Council has effectively reduced the financial burden of recurrent training which would help airlines to allocate their resources more strategically.

Even with recent policy tweaks, the aviation industry remains caught in a web of tax ambiguities and disputes. The 5% GST levy on economy class travel without ITC has become a heavy drag on airlines, forcing significant ITC reversals that directly inflate operating costs. While industry representations keep piling up, much needed clarity on taxability of codeshare agreements continues to be elusive. Adding to the turbulence, the question of GST on chartering services still hangs in mid-air, with the matter awaiting resolution before apex court  despite repeated judicial interventions.

The 56th GST Council meeting has proved to be a bonanza for the middle class wherein tax on daily use items, automobiles and its parts have been reduced.

Apparently, from the lens of aviation industry, this 56th Council meeting has not been very beneficial except for the proposed change in the place of supply of intermediary services. The various interpretational issues such as distinction between passenger transportation services and chartering services, taxability on codeshare arrangements, and inclusion of ATF in GST regime are some key questions which are yet to be deliberated by the government, and which require urgent attention.

The past years have been witnessed to the fact that although airline industry have paved the way for shaping futuristic India via various schemes such as regional connectivity scheme and UDAN scheme, the efforts have not been reciprocated by the government, at least from tax point of view. Considering the diminishing airline companies in India, it is the need of the hour that government pays special attention to the airline industry in order to revive aviation sector in India.

About the authors: Rohini Mukherjee is a Partner, Deep Upreti is a Principal Associate and Anshul Joshi is a Senior Associate at Lakshmikumaran & Sridharan attorneys.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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