Is Service Tax applicable for economy class travel on both domestic and international journey by Air - And should you tax poor Gulf passengers? Board should clarify
WE received this rather longish mail from a concerned Netizen, which I don't have the heart to edit.
"The service of “transport of passengers embarking on international journey by air, other than economy class passengers” provided by aircraft operators was brought into the service tax net with effect from May 01, 2006. This taxable service was defined in terms of clause (zzzo) of Section 65 (105) of the Finance Act, 1994 as follows:
“(zzzo) to any passenger, by an aircraft operator, in relation to scheduled or non-scheduled air transport of such passenger embarking in India for international journey, in any class other than economy class.
Explanation 1.-For the purposes of this sub-clause, economy class in an aircraft meant for scheduled air transport of passengers means,—
(i) where there is more than one class of travel, the class attracting the lowest standard fare; or
(ii) where there is only one class of travel, that class.
Explanation 2.-For the purposes of this sub-clause, in an aircraft meant for non-scheduled air transport of passengers, no class of travel shall be treated as economy class”
For this purpose, the word ‘passenger' was defined in sub-section (77c) of Section 65 of the Finance Act, 1994 as follows:
“(77c) "passenger" means any person boarding, at any customs airport, an aircraft for performing an international journey, but does not include-
(i) a person who has arrived at such customs airport from a place outside India and is in transit through India, provided that he does not pass through immigration and does not leave customs area and continues his journey to a place outside India; and
(ii) a person employed or engaged by the aircraft operator in any capacity on board the aircraft”
In Finance Act, 2010, the said clause (zzzo) of Section 65 (105) and sub-section (77c of Section 65 were substituted as follows:
“(zzzo) to any passenger, by an aircraft operator, in relation to scheduled or non-scheduled air transport of such passenger embarking in India for domestic journey or international journey”
“(77c) "passenger" means any person boarding an aircraft in India for performing domestic journey or international journey”
Initially when service tax levy was introduced on this service for the first time from May 1, 2006, the Board/ TRU through Circular D.O.F.NO.334 /4/2006 - TRU dated 28.02.2006 clarified that ‘economy class' passengers are excluded from the levy of service tax under this sub-clause. It was further clarified that transit passengers not leaving the customs area will also not be covered under this sub-clause. Also, in response to certain queries from the Board of Airline Representatives in India, the Board/ TRU through Circular ,Dated: October 17, 2006 clarified certain doubts as to leviability of service tax on the various components of the international journey undertaken by passengers embarking on international flights. In this Circular dated October 17, 2006 it was further reiterated that the levy of service tax was only on passengers embarking in India for international journey by any class, other than ‘economy class'.
When the new amendments were proposed to substitute the said clause (zzzo) of Section 65 (105) and sub-section (77c) of Section 65 in Budget 2010, the Board/ TRU through Circular D.O.F . No.334 /1/2010-TRU., Dated February 26, 2010, merely clarified that this taxable service is being suitably amended to extend this levy to cover all domestic and international air passengers embarking in India.
So far so good. But when you compare clause (zzzo) which existed prior to and after the amendment by Finance Act, 2010, the earlier provision excluded from its purview transportation by ‘economy class' on international journey. ‘Economy class' was explained hitherto by way of Explanations 1 and 2 appended to the erstwhile clause (zzzo). While the Circular dated 26.02.2010 highlights that the service tax levy is extended even to domestic travel, there is no mention as to whether journey by ‘economy class' is excluded from the purview of service tax levy or not.
In the latest amendment to clause (zzzo), the exclusion clause for ‘economy class' is conspicuous by its absence and the amendment is also devoid of any explanations. From this it can be inferred that the service tax is leviable not only on domestic and international journeys but also on the economy class of such travels undertaken by the passengers.
An argument could be made that the latest amendment is only to substitute clause (zzzo) and does not affect the two explanations which were appended to the erstwhile clause (zzzo). Unfortunately, this argument would fail on three grounds. One, in the body of erstwhile clause (zzzo) itself, there was an exclusion of ‘economy class' from the purview of taxable service which is not replicated in the newly substituted clause (zzzo). Two, the erstwhile explanations only explained what was meant by ‘economy class' which was specifically excluded from the purview of the taxable service. By virtue of the latest amended clause (zzzo), the said explanations, even if retained for argument sake, will not make any sense because the body of the amended clause (zzzo) does not have any exclusion of ‘economy class' from the purview of the taxable service as it existed prior to this amendment. Lastly, when a new ‘provision' substitutes an existing ‘provision' which has explanations or provisos appended to it and the new provision is devoid of such explanations/provisos, the intention of the legislature is to substitute the entire provision including any explanations or provisos already appended to it.
Another aspect of this amendment is the change in the definition of ‘passenger'. The definition of ‘passenger' vide erstwhile sub-section (77c) meant any person boarding, at any customs airport, an aircraft for performing an international journey and did not include a person who arrived at such customs airport from a place outside India and who is in transit and does not pass through immigration/leave customs area but continues his onward journey to a place outside India. The said definition also excluded a person employed or engaged by the aircraft operator in any capacity on board the aircraft. This aspect was also clarified at Point No. 4 in Circular dated October 17, 2006.
But the latest amendment to the definition of ‘passenger' does not provide for any exclusion as it existed prior to the amendment. In view of this, there is a danger of this levy being made applicable to transit passengers who do not cross the immigration/customs area and also on persons who are employed or engaged by the aircraft operators in any capacity on board the aircraft. With the result, the clarification at Point No. 4 of Circular dated October 17, 2006 comes to a naught.
In paragraph 3.2 of Circular dated February 26, 2010, it was stated by the Board/ TRU that the proposed modifications which expand the scope of the existing taxable services would come into effect from a notified date after the enactment of the Finance Bill, 2010. Now that the Finance Bill, 2010 is enacted into law with effect from May 8, 2010, the proposed amendments shall come into effect from a date which could be notified by the Board any time.
Since the notifications are yet to be issued by the Board to bring into effect these modifications, the Board may look into these aspects and clarify as to whether the intention is to levy service tax on all classes of travel both domestic and international and on all passengers embarking on such journey. If not, a notification may be issued to exempt levy of service tax on economy class on both domestic and international travel because persons travelling from the Gulf (from some South East Asian destinations) are predominantly transported by Air India Express flights which are economy class as defined in terms of Explanation 1(ii) to the erstwhile clause (zzzo) and such persons are ordinary people who toil for their livelihood in the Middle East and South East Asia. Also an exemption notification may be issued to exclude transit passengers and persons employed or engaged by the aircraft on travelling on board such aircraft. "
We would like to inform that the Finance Minister was aware of these aspects when he replied to the budget debate. In his speech in the Lok Sabha , he said
, “Ever since I proposed imposition of service tax on international and domestic air passengers in the Budget this year, I have received number of representations expressing concern that this levy would adversely affect the civil aviation sector and would make air travel prohibitive. I would like to clarify that it would not be so. The effective rates of levy, when they come into effect, would be a maximum of Rs.100 per travel for domestic journey in any class and a maximum of Rs.500 per travel for international journey by economy class. Further, domestic air travel to and from the North-Eastern sector would be exempt even from this moderate tax.”
So perhaps, all these will be covered in the Notifications to be issued soon. Let us hope the government will be kind to the Gulf passengers too.