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Legality of service tax levied on airline tickets - International Law Office

International Law Office

Aviation - India

Legality of service tax levied on airline tickets

October 27 2010

During the recent "Challenges of Indian Aviation" conference, International Air Transport Association Director General Giovanni Bisignani termed the service tax levied by the government on domestic and international airline tickets "illegal" under the International Civil Aviation Organisation rules. At present, service tax is levied at a rate of 10.3% on both domestic and international airline tickets.

Under Section 65(105) of the Finance Act 1994 (effective from 2006), service tax was levied only on international air fares (excluding international economy air travel). However, this section was amended and, effective from July 1 2010, its scope was extended to include service tax on all domestic and international airline tickets. Pursuant to this amendment, service tax is levied on all tickets for passengers who commence their journey in India, irrespective of class of travel, nationality or place of ticket purchase.

Owing to stiff industry opposition, the Ministry of Finance introduced certain exemptions to the quantum of tax, effective from July 1 2010. Pursuant to these exemptions, service tax at a rate of 10% of the gross value of the ticket or Rs10,000, whichever is lower, is levied on domestic airline tickets in any class; whereas service tax at a rate of 10% of the gross value of the ticket or Rs50,000, whichever is lower, is levied on international airline tickets in economy class. There are no exemptions on international business and first-class tickets.

The issue of taxation of airline tickets is addressed in the International Civil Aviation Organisation's Policy on Taxation in the Field of International Air Transport 2000,(1) wherein the council resolved that

"each Contracting State shall reduce to the fullest practicable extent and make plans to eliminate as soon as its economic conditions permit all forms of taxation on the sale or use of international transport by air, including taxes on gross receipts of operators and taxes levied directly on passengers or shippers."

The explanatory note to this resolution states that sales tax, consumption tax and value added tax (VAT) on international airline tickets increase the cost of air travel and can depress or divert traffic. Since VAT is levied by fiscal authorities, with only limited exceptions permitted, the ideal practice should be to set the tax rate at 0% rather than specifically exempt certain classes of air transport from such tax.

In the supplement to the policy, in its response India had stated, among other things, that there is no tax levied on airline tickets, but rather a departure tax called 'foreign travel tax' levied on every passenger leaving India by air.

In view of the policy and India's response to the council resolution, the levying of service tax could be viewed as a transgression from the earlier adopted position in respect of service tax. However, it is unlikely that this anomaly will result in a rollback of the imposed tax.

For further information on this topic please contact Ananjan Mitter at ALMT Legal - Advocates & Solicitors by telephone (+91 22 4001 0000), fax (+91 22 4001 0001) or email (amitter@almtlegal.com).


(1) Doc 8632-C/968 - Consolidated Council Resolution on Taxation of International Air Transport.

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