Economy class air travel set to become cheaper from July 1; Govt fixes tax rate at 5%

The economy class air travel in airlines is set to become cheaper while the business class will become dearer with the implementation of GST from July 1 as the government has lowered the tax rate on air fares of economy class while it has increased the tax rate on air fares of business class.

Economy class air travel will become cheaper with tax rate fixed at 5% against the existing 6%, under the upcoming goods and services tax (GST) regime from July 1.

However, for those travelling business class, tickets will become dearer as the tax will go up from 9% to 12%.

Industry experts say that today's announcement is in line with the government's aim to make flying affordable for the masses.

"Government's decision to levy 5% and 12% tax for economy and business class is a very good decision which will continue to support affordable fare regime in India. The government was sensitive to the impact of higher GST slab on industry and the consumer is significantly positive," according to Sydney-based aviation think-tank CAPA Centre of Aviation.

The GST Council finalised four tax rates of 5, 12, 18 and 28% to apply on services including telecom, insurance, hotels and restaurants.

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CAPA also said that this is likely to further boost domestic aviation traffic, where India is at the third spot.

India's domestic air passenger traffic stood at 100 million in 2016 and was behind only to the US (719 million) and China (436 million).

"Expect high growth rate in domestic traffic to continue in the near-term with further upside once the GST impact on the economy is visible in 1-2 years," it added.

The sentiment was echoed by travel portal Yatra.Com.

"Overall, this seems like a good move for the sector and should help the growth momentum continue. Economy airfare will get marginally cheaper which should drive continued passenger growth in the air market, while business class will see a moderate increase," Sharat Dhall, COO, Yatra.Com.

The 5 and 12% tax rates come as a huge relief for the industry, which had expressed concern over the draft GST law released last year pegging tax rate at 17% to 18%. This, as per a PwC study, would have led to a 9% to 12% increase in the cost of air travel for passengers.

A reason for keeping GST on passenger travel low is because airlines cannot claim credit on aviation turbine fuel (ATF) under the GST regime.

Currently, airlines can claim what is called a cenvat credit on the central excise duty for fuel. They will now lose as petroleum products, including ATF, are outside the purview of GST.

However, purchase of aircraft not meant for personal use, has been put under the highest slab of 28%. This will also invite an additional cess of 3%.