Global airlines' body IATA has asked the government to roll back a proposal to impose service tax on domestic and international air tickets on all classes, saying it would not only be counter-productive but also go against India's overseas obligations.
"I am writing to urge you to roll back fully the service tax applicable to domestic and international air transport (namely the tax applied to first, business and economy class tickets, and cargo)," International Air Transport Association (IATA) chief Giovanni Bisignani said in a recent letter to Finance Minister Pranab Mukherjee.
The 2010-11 Finance Bill, tabled in Parliament, proposed to expand the scope of air transport services "to include domestic journeys and international journeys in any class" for a 10 per cent service tax.
Currently, the tax is imposed only on foreign travel by First or Business Class.
Opposing "in the strongest terms" the "unacceptable" proposal, he said the service tax "not only contravenes (UN body) International Civil Aviation Organisation's policies, but is also counter-productive".
He quoted published studies to show that a 10.3 per cent of service tax and cess would increase the cost of tickets, which would lead to a fall of 8 per cent in air travel and have a resultant decline in revenue of the airline industry by over $300 million per annum.
Maintaining that taxation of any form on air transport was "a clear violation" of India's obligations under the Chicago Convention", Bisignani said ICAO policies were "formulated in recognition of the adverse impact that taxation would have on growth and development of the aviation industry".
Noting that the aviation industry was a vital component of the Indian economy, he said aviation had contributed $67.3 billion of economic activity in 2009 or "just under six per cent of India's GDP", besides employing a large number of skilled workers and facilitating growth in other industries.
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The 10.3 per cent service tax and cess "will result in 7-8 per cent fewer passenger journeys by air. This equates to a fall of 3.1 million domestic passengers, 152,000 fewer international journeys within the Asian region, and over 97,000 fewer to Europe in a year."
"The airline industry will face a reduction in revenues of $306 million due to the fall in demand across these three route areas alone," the IATA chief said.
Observing that the tax was "unaffordable" for the Indian aviation industry reeling under $1.5 billion losses, he said this "puts its fragile recovery at high risk and overall will cost the Indian economy more than the tax revenue raised" and "great care needs to be taken to ensure that this recovery gathers momentum and is not derailed".
The move to impose service tax was "absolutely a step in the wrong direction", which could not come at a "worse time" for aviation in India, Bisignani added.