Will Airlines Cut Air Fares After GST Rollout? Don't Count On It

The Goods and Service Tax (GST) for most products and services have been finalised by the GST Council headed by Union Finance Minister Arun Jaitley in Srinagar last week. As the Ministry of Civil Aviation tries to make flying affordable for the masses, GST on the economy class air travel has been lowered to 5 per cent, down 100 basis points from the existing service tax rate. Meanwhile, GST on business class air travel has been raised 3 per cent to 12 per cent. However airlines may not transfer the benefits of a lower tax on economy class tickets to passengers, said credit rating agency ICRA Ltd, adding that the GST tax reforms will not have any material impact on air passenger growth either.

"With airlines generating a major portion of their revenues from economy class, disallowance of input tax credit on inputs (excluding services) for economy class would result in an additional cost to the airlines. In the current scenario of pressure on yields due to increasing capacities and competitive intensity, the ability of the airlines to pass on the increased cost to the customers too will be restricted," Ms. Kinjal Shah, AVP and Co Head, Corporate Sector Ratings, ICRA Limited, said.

Breaking down the numbers, ICRA said while airlines can claim input tax credit on inputs such as spare parts, food items etc. but not on fuel charge on business class, for economy class they can only claim input tax credit on input services. In the current tax regime airlines can claim Cenvat (Central Value Added Tax) credit on all inputs (goods and services) excluding aviation fuel.

On Monday ICICI Securities issued a robust earnings outlook for India's aviation industry in the April - June quarter, citing a strong rupee, lower crude prices and better fares.

Commenting on the reduction in GST tax rules for economy class air tickets, ICICI Securities said that "This is incrementally positive for low cost carriers like IndiGo, SpiceJet, Go Air, and Air Asia." The report noted that increase in service tax from 9 per cent to 12 per cent for premium class air travel under GST is "incrementally negative for business class segment of full service carriers like Jet Airways, Air India and Vistara".