The new rate for air travel in the proposed GST regime is unlikely to have a major impact on the passenger growth even as differential input tax credit will adversely affect airlines, ratings firm Icra said.
The goods and services tax (GST) on the economy class air travel has been finalised at five per cent, which is 100 basis points lower than the existing service tax rate while the GST on business class air travel has been pegged at 12 per cent, which is three per cent more than the existing service tax rate.
"In Icra's view, these rates changes are not material, and should not have any major impact - positive or negative - on the air passenger growth.
"However, the lowering of tax rate on economy class travel is in line with the focus of the government to make flying affordable for the masses," the report said.
But the differential input tax credit between economy and business classes will adversely affect airlines, Icra said.
"With airlines generating a major portion of their revenues from economy class, disallowance of input tax credit on inputs (excluding services) for economy class would result in an additional cost to the airlines," Icra Ltd's assistant vice president and co-head for corporate sector ratings, Kinjal Shah said.
In the current scenario of pressure on yields due to increasing capacities and competitive intensity, the ability of the airlines to pass on the increased cost to the customers too will be restricted, she said.
Furthermore, according to the report, under GST, while airlines can claim input tax credit on all inputs on the business class; for the economy class they can claim input tax credit only on input services.
This is as against the current service tax regime, where airlines can claim cenvat credit on all inputs (excluding ATF) for both economy and business classes, the report added.
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