The year 2017 now stands etched as one of the most important years in the history of indirect taxes in India, as the country finally embraced the new regime of the goods and services tax (GST).
The year 2017 now stands etched as one of the most important years in the history of indirect taxes in India, as the country finally embraced the new regime of the goods and services tax (GST). Since the advent of GST, Indian industry has had mixed experiences in terms of taxes and compliances. Currently, the industry is trying to cope with the new law and changes it has brought in for different sectors, with aviation being one of the most impacted in this context. While air travel has witnessed significant growth in the recent past, the sector faces several challenges in its path to a smooth implementation of GST. Under the erstwhile service tax regime, transport of passengers by air was subject to tax based on the concepts of ‘place of embarkation’ and ‘continuous journey’ originating in India. Based on these principles, while a Delhi-London-Delhi ticket attracted service tax on the entire journey, a London-Delhi-London ticket did not attract service tax at all. Under GST, while the lawmakers did attempt to keep taxability of air transport services similar to the earlier regime, a technical reading of the provisions reflects modified parameters of taxation. It appears the taxability of each leg of the journey would be determined independently and each leg of a journey with embarkation point in India would be taxable under GST. If this be the case, airlines would be obligated to split airfares for each leg of the journey and thus, adopt a sector-wise pricing model.
Such splitting of airfare is a challenge for airlines and may also be used for undue competitive advantage in some cases. One of the components of airfare is the airport levy collected from passengers as part of the ticket cost. Airport authorities typically levy certain fees/charges on each passenger for providing facilities to passengers at the airport, including security. These fees/charges are recovered by the airlines and passed on to airport authorities. Taxability of these charges in the hands of the airlines has been a matter of debate for years now. It seems that this debate would continue as the valuation provision under GST provides for inclusion of all other taxes, levies, fees other than GST in the value of supply. The fact that recent decisions by the Tribunal affirm that such fees/charges are not taxable in the hands of the airlines, it would only add fuel to the fire.
Ambiguity and divergent positions are not limited only to the taxability of airfare but extend to various ancillary services also, such as excess baggage, seat reservation, cancellation fee, etc. The moot question is whether such services qualify as naturally bundled with the principal service of air transport. Airlines have adopted varied positions with respect to these ancillary services and the issue continues to remain unclear. As a result, these issues carry their legacy into the GST regime. Airlines have also struggled in coping with changes required in tax logic and calculations, as they are largely dependent on the global ticket reservations systems. Passenger airlines primarily rely on computer reservation system (CRS)/ global distribution system (GDS) companies for handling bookings and related data management.
Considering the lack of preparedness of CRS/ GDS companies to implement required IT systems changes, the International Air Transport Association, made representations to the ministry of finance seeking specific dispensation to passenger airlines under the GST laws. In the absence of clarifications, majority of passenger airlines have decided to implement an interim solution wherein the airlines have replaced service tax with GST, but retained tax positions and logic adopted under the service tax regime. Needless to say, the legal validity of this interim solution and the consequences thereof are yet to be evaluated. Considering the ambiguity surrounding the validity of the interim solution and the final GST position, it is critical that the government and airlines take concrete steps towards finalisation of taxability of air transport services under GST. Issuance of clarifications, circulars, guidance notes, FAQs on tax positions could be the initial step in this direction.
(With inputs from Siddharth Tandon, senior manager, Deloitte India)