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Service tax on air travel
S Madhavan
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January 15, 2007

The Finance Act, 2006, imposed service tax on those embarking in India for international travel in a class other than the economy class. From an analysis of the definition of the taxable service relating thereto, it can be seen that the intent is to tax international travel and not domestic travel.

Further, the objective is to only tax international travel in a class other than economy class. The Central Board of Excise and Customs's Circular No 85/3/2006-ST, dated October 17, 2006, relates to the taxability of several situations arising from international air travel.

At the outset, it must be stated that the definition of economy class, so as to provide for its exclusion from the levy, is a narrow one and does not accord with the commonly understood meaning of the term as is prevalent in commercial parlance.

The definition states that economy class means the class attracting the lowest standard fare. It is well known that airlines have several categories of economy class, at different fare points. All such categories are known as economy class in airline parlance.

However, the exclusion from the service tax would only apply to the category attracting the lowest fare. This narrow definition appears not to be in consonance with the objective of taxing business/first-class travel alone.

There is, of course, an argument with regard to the word "class" itself and as to whether the word would extend to all "categories" of the same economy class, notwithstanding differential fares. An appropriate broadening of the definition of economy class is thus urgently required.

In terms of a harmonised interpretation of the definitions of "passenger" and "international journey," it can be concluded that a person commencing an international journey on board an aircraft from a Customs airport in India to a place outside India is covered under the ambit of the tax.

If this be the case, some of the clarifications incorporated in the circular issued by the CBEC appear to be incorrect. For instance, it is stated therein that in the case of an international journey commencing from an Indian airport and involving stopovers/transfers at an intermediate airport outside India, the service tax would be leviable on the entire value of the ticket and won't be limited to the sector of the journey prior to the stopover.

If a stopover or transfer is understood to mean deplaning at the intermediate airport, resulting in disembarkation from the aircraft, it would mean that the international journey, as defined in service tax law, has concluded at the intermediate airport.

This is because the definition states that the international journey refers to the travel on board an aircraft to a place outside India. In a situation of stopover/transit, the travel on board an aircraft concludes at the intermediate airport and subsequent journeys on board another aircraft, from the intermediate airport to another airport outside India, are not covered by the definition of international journey. Such journeys cannot therefore be charged to service tax.

In the absence of independent/split ticketing for these two separate journeys, the question that will arise consequently, as a result of the above position in law, is the identification of the appropriate valuation of the tax base.

The valuation rules do not provide any assistance and in fact would, if at all, support the charge of the tax on the entire value. This issue needs to be urgently addressed.

The aforesaid argument, in the light of the definition of "international journey" in service tax law, is equally applicable to a situation of a round trip. Here again, the clarification in the circular that the service tax is leviable on the total value of the round trip ticket is not tenable, on the basis of the definition of international journey.

In a round-trip situation, the return trip is not an international journey according to the existing definition. The value of such return trip cannot therefore be charged to the service tax. Where there is a single ticket for the round trip, the apportionment of the airfare for the outgoing journey, for the purpose of the tax, is again the problem that needs to be addressed.

However, the point to be noted is that the clarifications in the circular in this regard appear to be incorrect. In any event, the circular is silent as to how the clarifications have been arrived at.

Another clarification, on travel in a domestic sector as part of an international journey, is correct as long as there is no stopover/conclusion in journey in the domestic leg. If such a journey has concluded, the domestic journey would not be covered under the ambit of "international journey."

However, the mere routing of the aircraft to or through another domestic airport, without any attendant conclusion of a journey, would be of no relevance and the clarification to this extent is therefore correct.

A concluding point that is to be noted on the service tax on international travel is the exclusion of this taxable category from the provisions relating to exports/imports of services.

As a result of this exclusion, no resort can be made to the rules relating to exports/imports, in order to argue either that an export of service has taken place or that an import of services has occurred.

The writer is leader, indirect tax practice, PwC

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