Allow airlines to use GST credit on spares for economy-class operations, say experts

After failing to get any major stimulus for the airline sector, major domestic airlines want the Government to allow the GST credit on spares be used for economy class operations.

The GST paid on spares has been a significant cost for the airline operations. This is because the current GST legislation does not allow credit of the GST paid on goods to the extent of use in “economy class” operations which form the major revenue stream for the sector.

Covid-19 pandemic has led to significant losses for the aviation sector which was already suffering because of the competitive prices in the Indian market and rising costs of ATF. While the current situation has led to decreased costs of ATF because of the fall in crude prices globally, it is not sufficient enough to tide over the current crisis, top airline executives and analysts told BusinessLine . The accumulated credit during the current period is worth ₹500-600 crore, they said.

The executives said indirect taxes have a huge impact on the running costs of the airlines. Given the current landscape, the need of the hour is to support this sector by bringing in some indirect tax reforms.

Cost of operations

Niyant Maru, Chief Financial Officer, Tata SIA Airlines, said,“The output GST liability during the Covid-19 affected period is likely to be lower than the GST paid on procurements. “The GST paid under reverse charge mechanism on costs such as lease rentals, standard exchange programs, etc are leading to significant accumulation of credits for many airlines,” Maru said.

“We understand that the Government has always been forthcoming and supportive in resolving the multiple GST issues being faced by the aviation sector, but to prevent the ailing domestic carriers from folding up, the Government should resolve some of these issues which are adding to the cost of operations for the airlines,” he said.

The credit accumulation issue is likely to be faced by many domestic carriers, Saurabh Agarwal, Partner with Ernst & Young India, said. “If the amendment is made in the GST legislation to allow airlines to use the GST credit for payment of their reverse charge GST liability it would surely help in reducing the cash outflows for many airlines.”

“The relaxation of GST law by allowing credit of spares to the airlines for economy class operations and payment of reverse charge GST liability using the accumulated GST credits would be welcomed by the airlines,” Rao said.

According to various reports, the airline industry’s losses are as high as ₹75-90 crore due to the pandemic. With up to 40 per cent of the costs being fixed, it is difficult for the industry to manoeuvre in terms of reducing costs, the top executives said.

According to the International Air Transport Association, airlines in India could suffer revenue losses as high as $11.2 billion this year leading to 2.9 million jobs with passenger demand falling by around 50 per cent. passenger demand falls by 47 per cent. IATA has also said that the Covid-19 crisis will see global airline passenger revenues drop by $314 billion in 2020, a 55 per cent decline compared to 2019.

Airlines in the Asia Pacific are expected to see the biggest revenue drop of $113 billion in 2020 compared with 2019 with a 50 per cent fall in passenger demand. “The situation is deteriorating. Airlines are in survival mode. They face a liquidity crisis with a $61 billion cash burn in the second quarter,” said Conrad Clifford, IATA's Regional Vice-President for Asia-Pacific.

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