Government assures airlines that their costs will not increase with the enforcement of the GST

PhotoFuel makes up over 40% of the operational cost of airlines in India. : Ramesh Pathania/Mint

New Delhi. The government has assured airlines that their costs will not increase with the enforcement of the new goods and services tax (GST) starting on 1 July, an airline executive said.

“We have explained to the government what the issues are and the government’s perspective in that has been that ‘look we will ensure that at least the current costs are not going to go up,”’ SpiceJet co-founder and chairman Ajay Singh said on the sidelines of an event in the capital last week.

GST will subsume excise and service tax and other local levies, dismantle inter-state barriers to trade in goods and services and unify India into a common market.

Singh said the Federation of Indian Airlines (FIA) group had communicated its concerns about the likelihood of costs going up to the aviation ministry.

Fuel makes up over 40% of the operational cost of airlines in India. Over the past few years, service tax on airfares has also gone up. Airlines are also paying higher airport charges and fees.

Most airlines say they have seen years of profitless growth. Lower fuel prices helped some of them earn profits in the last fiscal year, which they are hoping to repeat in the year to March.

Airlines are concerned that higher taxes may put the brakes on double digit growth in air traffic. Domestic air traffic has nearly doubled from 51 million in 2010 to nearly 100 million in 2016.

There are about 900 planes on the order books of airlines scheduled to be delivered annually over the next decade or more.

An aviation ministry official said the ministry had, in its talks with the finance ministry officials, communicated three key points—service tax should be maintained at the current level, jet fuel should come under the GST regime so the tax is reduced and aircraft leases and imports should be kept out of the purview of the tax.

“We have made our views clear, this sector is one of the bright spots and it does not make sense to punish it,” the ministry official said on condition of anonymity.

Domestic traffic is expected to grow by close to 25% in 2017-18 and approach 130 million passengers, but growth prospects may be hurt by higher taxes, aviation consulting firm CAPA said in its 2017-18 outlook report on Indian aviation.

A higher effective tax rate for economy class air travel could possibly increase fares by 9-12%.

“Given the price sensitivity of Indian passengers, this could have a significant negative impact on demand. The implementation of GST could possibly also result in higher upfront costs for aircraft and leases, spares and parts, and distribution costs, increasing cash flow requirements, although airlines may receive input tax credits later,” the report said.