Flying overseas to make a bigger dent in pockets

NEW DELHI: International travellers, beware! You may end up paying service tax on a economy class ticket too, if it does not happen to be the cheapest fare offered by the airline concerned, on the particular sector.

The revenue department is of the view that all tickets sold under the ‘economy class’ tag are not entitled to be exempt from service tax.

Airlines offering differential fares on economy class will get exemption only for those seats which are sold at the lowest fare. All other tickets will attract 12.2% service tax (including education cess) irrespective of the classification used by airlines.

First and business tickets were brought under the service tax net in the ’06 budget, while the economy class was exempted.

Airlines sell economy class tickets at a number of slabs, depending on demand and timing of the booking. This, the revenue department feels, is not correct and only the cheapest tickets should be entitled to service tax exemption.

Finance ministry sources said airlines are heading for trouble since they would be asked to pay service tax — at the time of assessment — from their own pocket, if they do not impose the levy on all, but the cheapest of economy class fares. Officials clarified that the government has intended to exempt only the lowest fare on a flight, from the service tax net.

The Finance Act ’06 imposed 12% service tax on “transport of passengers embarking on international journey by air” for all classes “other than in the economy class.”

The revenue department wants to treat only the lowest fare as economy class for the purpose of service tax. As a result, 12.2% tax is likely to be imposed on all other tickets. Service tax has been increased from 10% to 12% in the ’06 Budget.

With 2% education cess on it, the total tax incidence works out to be 12.2%. The airline industry feels the demand of the revenue department would only lead to higher cost for passengers. “It is usual for airlines to have more than single economy class fares.

If the government would insist that service tax should be levied on all tickets except for the lowest fare available on a flight, airlines would be left with no option but to pass it on to the customers,” an airline industry source said.

Experts apprehend that the service tax on international air travel would force passengers of foreign airlines to purchase their tickets overseas.

On April 25, government notified 15 new taxable services, including international air travel by first class and business class. Service tax on these activities was made effective from May 1, ’06.