GST and its impact on aviation and air cargo

That India has finally come under a common tax regime is obviously something to cheer. But does the passing of the GST bill bode well for the aviation and air cargo sector?
Surya Kannoth

The passing of the GST has been proclaimed as a historic day for India. For one, India Inc. seems to be happy on the whole, with the clearance of the GST. The main reason is obviously that it brings the entire country under one single, uniform tax policy.

But what does the passing of this one bill mean for the aviation and air cargo sector and is it as important as it seems to be? Yes, it’s a reform, and a long pending one at that (dial back to 2006 when it was mooted and rejected for the same reasons it’s being approved now) GST takes care of the compounding effects of taxes, which brings down the overall MRP. Some economists have that this could claimed add another two percentage points to India’s GDP growth rate.

For the carriers, who have by and large been subject to a single service tax, and have the benefit of various duty exemptions on imports, moving to a state-level taxation structure would be fraught with complications. The decision to keep out aviation turbine fuel from the GST levy would no doubt add to this complication, possibly resulting in increased costs, stated a PriceWaterHouse Coopers study on the Draft GST.

On the other hand, the GST is expected to give a fillip to the Maintenance, Repair & Overhaul (MRO) industry. On one count, the government’s intent to tax maintenance activities undertaken outside India (on reverse charge) would nullify the tax arbitrage associated with undertaking repairs outside India. Also, the treatment of works contracts as a ‘service’ under GST would bring certainty on taxability of maintenance activities and reduce the multiplicity of taxation.

Currently, air travel attracts service tax – 6 percent for economy travel and 9 percent for non-economy travel. Though the GST rate has not been announced, the Chief Economic Advisor has suggested a rate of 17- 18 per cent. A GST rate of 18 per cent may lead to a 9-12 percent increase in the cost of air travel for passengers, thus hampering the growth of the industry.

Furthermore, the lower rate of service tax for air travel is subject to the carriers not availing credit of inputs, which primarily comprises the aviation turbine fuel (accounting for approx. 35 percent of the cost of the carriers). Under the GST also, the carriers would not be able to take credit on aviation turbine fuel (which would be kept outside the ambit of the GST), the report stated.

In such circumstances, it is imperative that the carriers ask for a lower rate of GST on passenger travel. Unlike the current regime, where the place of supply for transportation of cargo is the destination of the goods, under the Model Law, the place of supply is segregated for B2B and B2C supplies: for B2B supplies, the place of supply would be the location of such registered person. For B2C supplies, the place of supply would be where the goods are handed over for transportation. This means that export cargo, which was hitherto not subject to service tax, would attract GST. Of course, the exporter may be able to claim a refund of the GST charged, but this could lead to cash flow issues.

“This would really help Indian economy in general and the logistics industry in particular to shake off the inefficiencies and lower transaction cost,” lauded Vijay Kumar, COO, Express Industry Council of India on the passing of the GST bill.

However, for India to be truly a one common market, Kumar is hopeful that the government will ensure that all the border check-posts between states would be removed. The international import and export shipments should be zero rated under GST regime. For international shipments to ensure seamless movements within the country, it is vital that the Customs clearance system (ICEGATE) is linked to GSTN.
“Aviation Turbine Fuel is currently treated separately from other petroleum products for claiming mod vat credits and if ATF is not brought under the GST regime there would be substantial cost impact on ATF used in our member aircrafts due to cascading duties leading to price increases.We are also hopeful that in order to lower compliance cost, network industries like express industry, banks will only need to do single centralised registration under the GST regime as is the case with Service Tax Registration presently,” said Kumar.

Currently, maintenance and repair of aircraft undertaken outside India do not attract service tax in the hands of the recipient carrier.

However, as per the Model Law, services rendered by overseas MROs attract GST in the hands of the domestic carriers even if the services are performed outside India. Though the carrier should be entitled to input tax credit of the GST paid, it could impact cash flows. Further, parts/ spares imported into India and supplied to the carrier (for use in repair/ maintenance of the aircraft) are currently exempt from levy of customs duties. However, as yet, no specific exemption has been envisaged under the GST on such supplies, explained the PwC report.

Under the current regime, services rendered by airports and other service providers at the airports (such as ground handling, cargo handling) are taxable based on the place of performance of the services, i.e. location of airport. Since the services are rendered in India, the activities attracted service tax irrespective of the fact that the services were rendered to carriers outside India.

Thus, there exists a possibility to examine and identify the transactions (such as overflying charges) which should not attract GST, since the service recipient is located outside India.