As a part of the taxation proposals presented by the finance minister in February this year, the scope of Service Tax on air travel services was proposed to be expanded. Earlier, the tax was limited to international journeys in classes other than economy class. It was proposed to expand the ambit to cover both international and domestic journeys, and in any class of travel.
Service Tax is charged at 10.3% of the cost of the ticket. Since the cost of air travel was expected to go up by nearly 10%, the proposed levy ruffled quite a few feathers in the aviation sector. Heeding to the concern that the levy would adversely affect the civil aviation sector and make air travel prohibitive, the finance minister announced in his speech before Parliament on 29 April that: “The effective rates of levy, when they come into effect, would be a maximum of Rs100 per travel for domestic journey in any class and a maximum of Rs500 per travel for international journey by economy class. Further, domestic air travel to and from the North-Eastern sector would be exempt even from this moderate tax.”
The Finance Act 2010 has since been passed, and the Government has notified on 22 June that the new levy will come into effect from 1 July. A notification has been issued regarding the concessional rate of Service Tax of Rs100 for domestic journeys and Rs500 for international economy class journeys. Another notification has been issued fully exempting from Service Tax journeys terminating or originating in the North-East sector. There is no concession for international journeys by first / business class, for which Service Tax continue to be charged at the normal rate.
Although the expanded scope of the levy will come into effect from 1 July, one could book tickets on the websites of most airlines and travel portals as late as on 29 June without any Service Tax being charged. This raises the question as to what happens to air tickets for journeys on or after 1 July which have been booked and paid for much before this. There would be many instances where tickets have been booked before the Finance Act 2010 was passed, or even before the taxation proposals were announced by the finance minister in February. In all fairness, passengers would feel that they should not be called upon to pay Service Tax on tickets booked and paid for much before the levy became effective.
There is no clarity regarding the effective date for reckoning the rate of Service Tax. In the past, the Central Board of Excise & Customs has clarified regarding how services for which payments have been received in advance should be dealt with. In 2009, enabling provisions have also been introduced which empower the Government to notify rules regarding the date for determination of the rate of Service Tax. However, such rules have not been notified so far.
Service Tax is chargeable on any taxable service provided or to be provided, and the amount on which tax is to be charged includes any amount paid before, during or after providing the service. Hence, one view is that in respect of tickets booked before 1 July, the amount received by the aircraft operator is liable to be taxed as an advance for providing the taxable service. There is also case-law wherein it has been held that the taxable event is providing of a service, and the rate of duty on the date when the service is provided is the relevant rate.
However, a contra view is that the effective date is the date on which payment for the service is received, since a service provider is liable to pay Service Tax to the Government after receiving the payment from the client. There are also decisions wherein this view has been upheld.
Another question relates to treatment of journeys involving connecting flights. If a passenger books a ticket from Jammu to Mumbai via Delhi, would that be treated as one journey for the purpose of charging the concessional rate of Rs100? Would the answer to this question depend upon whether or not a change of aircraft / airline is involved in the connecting station?
Similar issues pertain to journeys terminating or originating in the North-East. What happens if a passenger travels from Jammu to Guwahati via Delhi, with a change of airline or aircraft at Delhi? Will only the second leg of the journey (i.e. between Delhi and Guwahati) be exempted? What happens if, due to the timing of the available flights, the passenger has to take a forced halt at Delhi?
There are other problems which may beset the new levy. The cap on the rate of Service Tax has been made subject to a condition that credit of duty paid on inputs used for providing the service has not been taken. In effect, this condition means that if an aircraft operator is to charge Service Tax at the concessional rate of Rs100 for domestic journeys, and Rs500 for international journeys by economy class, the aircraft operator cannot take credit of duty (commonly known as CENVAT credit) paid on the inputs used for providing air travel services to passengers. However, the finance minister’s speech dated 29 April did not mention that the cap on the effective rate of Service Tax would be subject to any condition regarding CENVAT credit. Denial of CENVAT credit to the airlines would effectively negate the concession announced by the FM.
Another problem may arise in international flights where the aircraft has economy as well as first / business class facilities. The concessional rate of Rs500 for economy class is subject to a bar on taking CENVAT credit, but there is no such bar for the tariff rate of 10.3% chargeable form first / business class passengers! How will the airline distinguish between the inputs used for transporting economy class passengers from the inputs used for transporting first / business class passengers? Further, it may not be possible for an aircraft operator to know at the stage of taking CENVAT credit (which is usually at the stage of procurement of the inputs), whether the input in question is to be used for providing service at the concessional duty rates of Rs500 or Rs100, or at the applicable tariff rate of 10.3%.
These are some of the questions which come to mind regarding the scope and the applicability of the expanded ambit of Service Tax on passenger air travel services. The sooner the authorities come out with suitable clarifications, the better it will be for both aircraft operators and passengers. Otherwise, let us brace ourselves for a fresh round of disputes and litigation!
(The authors work with Luthra & Luthra Law Offices. Views expressed are personal.)