The finance ministry is reviewing the levy of service tax on air travel. In the coming Budget, it may consider either doing away with the tax or removing the upper limit.

In July last year, the ministry had put a cap on service tax in case of domestic flights at 10 per cent of the gross value of the ticket, or Rs 100 per travel, whichever is less, and on international travel by economy class at 10 per cent of the gross value of the ticket, or Rs 500, whichever is less. A finance ministry official said since the service tax was capped at Rs 100 for domestic and Rs 500 for international travel, in many cases, the credit of tax paid on inputs used to provide services was more than the service tax paid by the airline.

Input tax credit is not given when an item is exempted from service tax. But by paying a nominal amount as service tax, airlines can claim tax credit, which is sometimes huge. So, either the service tax should go or the cap removed, the official told Business Standard.

Excise duty and service tax paid by a service provider on inputs used to provide services are available to it as credit. This can be used to pay the service tax due to the government on the services provided.

A service provider exempted from service tax on output services cannot claim credit on taxes incurred on the costs. Maintenance, airport landing, parking and security are some of the input services used by airlines.

When you pay service tax on a value basis (for example, 10 per cent of Rs 10,000), you get credit for ATF, which is 30 per cent of the cost of an airline. But when you pay it on a fixed basis (Rs 100 or Rs 500), the input tax credit on excise duty is not given. The credit is paid only for the input service. Still, most airlines opted for the fixed option where they had to forgo the ATF credit. The sector has not yet recovered fully and the increase in ticket prices will have affected customers, said Sujit Ghosh, partner, BMR Legal.

The government had proposed in Budget 2010-11 that 10 per cent service tax be charged on air travel. The move was aimed at raising Rs 600 crore and Rs 1,000 crore annually from domestic and international operations, respectively.

The aviation industry opposed it. The finance ministry later issued a notification and said service tax would be levied at 10 per cent of the ticket value or Rs 100 for passengers travelling in any class within India, and 10 per cent or Rs 500 per journey for those on an international journey in the economy class.