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Service tax on premium travel may go
December, 23rd 2006

Frequent fliers hopping to international destinations on premium class may hope for some reduction in fares. The finance ministry is considering a proposal from Indian airlines to remove service tax on first and business class travel to international destinations.

Airlines have argued that removal of service tax on these heads would help them manage their costs better while reducing the ticket prices for international business and first class travellers. Service tax burden increases the cost of international travel in the first and business class by 12.24%.

The industry has also demanded removal of service tax imposed on landing, airport and air navigation charges.

According to industry sources, the airlines have said the tax on business and first class tickets is not a global practice, and it puts India at a disadvantage as a connecting point to other countries. By raising the total amount paid by passengers connecting through India, in comparison to connections via any other point, the tax jeopardises Indian carriers potential as international network carriers, the domestic carriers have told the finance ministry.

The tax reduces the competitive advantage of Indian carriers vis--vis their overseas counterparts who can price their tickets relatively cheaper since they do not have to pay the service tax on business class tickets, airlines have argued. According to Finance Act 2006, the definition of `taxable services includes `fare charged to business class and first class passengers embarking on international journeys from any customs airport in India.

Domestic airlines have also cited logistical and technical difficulties in implementing the tax. The service tax provision is logistically difficult to implement as fares charged and passenger routings -- both domestic as well as international -- vary. There are also logistical and technical complexities with connecting passengers.

Service tax on first and business class tickets should be removed, as implementation and collection of this tax is logistically difficult and puts the Indian aviation industry at a competitive disadvantage, the Federation of Indian Airlines has written to the finance ministry.

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