GST hiccups take toll on aviation air freight and logistics industries

The National Democratic Alliance government’s bold initiative of ‘One Nation, One Tax’ launched in July 2017, the General Services Taxes program, has taken its toll on key industries with major players collectively asking for some relief

India’s Goods and Services Tax (GST) program now in its initial stages of implementation has encountered teething problems across many verticals and the government is tweaking the same depending on feedback it is getting.

The NDA government’s bold initiative of ‘One Nation, One Tax’, launched in July this year, has not gone well with a nation which has a significant section of the population which would do well without paying taxes.

Previous governments have dithered on this but no so the present government which is undertaking bold reforms even if it may not be popular.

The central taxes included into the GST are: central excise duty, additional excise duty, service tax, countervailing duty, and special additional duty of customs. Additionally, GST also covers some state taxes such as: sales of goods and services, entertainment, central sales tax, octroi and entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling.

Airlines feel the heat
With that preface, let us look at the logistics and the cargo industry and how the GST has impacted them. Already airlines in India are crying that they will become globally uncompetitive.
In a meeting with the Ministry of Finance, they have indicated that the aviation industry will be adversely affected to the tune of Rs.5,700 crores annually. The Federation of Indian Airlines (FIA), which represents IndiGo, SpiceJet, Jet Airways and GoAir, in a recent representation to the Ministry said the guiding principles of the new indirect system — revenue neutrality and equity — have been violated by the GST.

“The airline industry will be hit by ₹5,700 crore (less than 100 million USD) per annum and the GST will make the flourishing sector sick. The Indian carriers will become globally uncompetitive as it will give huge benefit to competing airlines, especially from the Gulf,” the airlines said in their submission to the Finance Ministry.

They said the GST was against the objective of “affordability and sustainability” stated in the National Civil Aviation Policy 2016 and regional connectivity scheme UDAN released last year.
They suggested to the government that the Integrated Goods and Services Tax (IGST) should not be charged on re-import of repaired aircraft engine and parts, inter-state transfer of goods for captive consumption and import of serviceable parts under service exchange program.

As per GST, 18% tax is charged on re-import of aircraft spare parts which were earlier exempted from import duty and service tax. The government has made GST applicable on transfer of aircraft spares, which are kept in central stores, between States on a daily basis.

The high rate of IGST on import of purchased aircraft parts was another issue flagged by the airlines. Aircraft seats and parts and battery are taxed at 28% and nut bolts, aircraft engine and motor is charged at 18% whereas, landing gear and propellers are taxed at 5% under GST.

Air Cargo seeks parity treatment

Similarly, air cargo players have also urged the government to tweak the GST in such a way that it helps the industry in growing. Air cargo should be treated at par with other logistics sector like roads which is subject to 5% tax rate. They have sought from the government a reduction in the tax rate from the present 18%.

With the introduction of GST, octroi has been removed, which has propelled the demand for cargo movement by road. In order to protect air cargo from the negative impact emanating from this development, air cargo players have sought connecting rail cargo with air cargo.
As such the airlines are feeling the impact of GST. While airlines can claim input tax credit on all inputs (excluding ATF) on the business class; for the economy class they can claim input tax credit only on input services. However, there is no clarity if the existing exemptions would continue or not under GST structure.

The contention is that when the domestic cargo has registered a growth of 8% at a CAGR during FY07-17 and international cargo at 6.2%, the air cargo industry needs all the incentives, tax or otherwise to keep the development agenda running.

As per IMF forecast, GDP growth in India is forecast to grow at an average of 7.5 precent-8.2 percent during FY18-21 and thus, air cargo could be at the centre of supply.

Weak inbound freight demand

The air cargo sector in India is still fragmented and faces certain challenges as air traffic is mainly concentrated at only a handful of airports. The challenge lies in connecting cargo volumes of Tier 2 & 3 cities with major cities for air transportation, which lacks appropriate cargo infrastructure.

The inbound freight demand is not very strong and is not enough to fill up the aircraft but that is not the case with exports which see much higher utilization.
As a result of intense competition, the export rates have been low. Hence, airlines are finding it tougher to make profit to keep India on their route.
The President of Air Cargo Agents Association of India, Hemant Bhatia, says “An issue of great concern to the air freight sector is the applicability of 18 percent GST on export freight. This category was zero rated in the service tax regime. The new levy on export freight under GST will have a cascading effect on freight forwarders and exporters, and will increase the cost of exports from India. ACAAI has vigorously taken up this issue with the concerned Ministries and Government Authorities.”

While GST has included numerous indirect taxes and levies pan India into a single tax bundle, it is a welcome development because in due course, it is expected to greatly facilitate trade and industry on the taxation front.

However, there are operational and system performance issues which continue to plague the customs system ICEGATE, Bhatia added.

The frequent disruptions and downtime of this system has reached alarming levels and cause extensive delays in the clearance of import and export cargo.
Consequently, import goods do not reach the ultimate recipient in a timely manner, while export goods often miss their flight connections and deadlines of the importers in the destination countries. This scenario severely impacts the export competitive-ness of our country.

Logistics Performance Index improves

Though India’s logistics performance index (LPI) as per World Bank has catapulted from 54 in 2014 to 35 in 2016, it is hoped that with the ironing out of the issues related to GST, it should propel the transport and logistics sector to greater heights.

Market research agency Novonous in its recent report estimates that 3PL logistics market in India is expected to be worth $301.89 billion by 2020. By then, Indian logistics market is expected to grow at a CAGR of 12.17 percent primarily driven by the growth in the manufacturing, retail, FMCG and e-commerce sectors.
This growth rate is also based on the expectation of GST being implemented properly and the logistics companies optimising their operations to reduce cost and increase their margins.
Further, it is the implementation of the GST that would increase productivity and raise efficiency levels in the logistics sector and the economy as a whole. According to various industry estimates, freight times will come down by 30-40 percent and logistics costs are expected to reduce by 20-30 percent.

With GST in place, there will be consolidation of warehouses, thus, reducing lost time between transporting from one warehouse to another. Shorter supply-chain cycles will entail lesser time spent on unnecessary activities like paperwork, material scrutiny at checkpoints, compliance with multiple regulations, etc.

This will make it smoother for transport companies as they will be able to transport goods with lesser stoppages and breaks in the journey.