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Service tax on fuel surcharge to push up air fares
July, 11th 2006

In a move that could turn premium air travel to overseas destinations dearer, the revenue department is planning to bring fuel surcharge on air trickets under the service tax net. If cleared, the move would have a major impact on the cost of international travel as surcharges for overseas destinations go up to $60 per sector.

The revenue department has been discussing the issue with the travel trade, industry sources said. It is a complicated issue and technically nothing prevents the tax from being extended to the fuel surcharge component, said Ankur Bhatia, managing director, Amedeus India. However, since it would lead to higher costs for the passeners, he felt the government should be more careful.

Fuel surcharge varies from time to time depending on the global price of aviation turbine fuel (ATF). When ATF prices go up, airlines hike the surcharge and bring it down in line with oil prices, said a representative of an international carrier. Since it is meant only to compensate for the cost of fuel, airlines feel service tax should not be imposed on this component of the travel cost.

According to existing rules, service tax is applicable to business class and first class tariffs. Economy class is exempt from the recently-introduced levy. The fuel surcharge is over and above the basic fare and has been going up due to stiff oil prices. Airline ticketing agents get commission from the airliner only on the basic fare and fuel surcharge is kept out of the ambit. The service tax liability is basically of the agent who issues the ticket and not of the airline.

The airline agents also charge consumers on this basis. These agents pay up service tax ission at rate of 12% (plus education cess of 2%) or 1.2% of the basic fare in the case of international sector and 0.6 % in case of domestic sector.

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