Air India has been attempting to boost sales of its premium economy seats by pricing them slightly higher than economy class seats. However, this strategy has yielded mixed results. The recent decision by the Goods and Services Tax (GST) Council to increase the tax rate on business and premium cabin seats from 12% to 18% has raised concerns for the airline. The tax rate on economy class seats remains at 5%. As the only Indian carrier offering premium economy, business, and first class seats, Air India is likely to be disproportionately affected by the rate hike.
According to an Air India executive, the increased GST rate will make premium economy seats less attractive to price-sensitive Indian customers. The airline has been facing challenges in selling premium economy seats, particularly in non-metro markets, where several corporates have yet to adopt this class for staff travel. Air India’s premium economy seats are currently priced ₹1000-1200 higher than economy class on domestic routes.
To improve its product offering, Air India is retrofitting its aircraft to include three-class cabins, with 18 legacy Airbus A320 aircraft already completed and nine more expected to be finished by the end of September. The International Air Transport Association (IATA) has expressed disappointment at the GST rate increase, stating that it will dampen demand and undermine profitability for Indian carriers.
The aviation industry has been demanding the removal of GST on international flight tickets, citing that other countries do not levy such taxes on international air travel. The inclusion of aviation turbine fuel under GST is also a pending demand. Industry experts argue that international air travel should be exempt from GST, as exports of goods and services are zero-rated under the tax regime. The GST Council’s decision to rationalize rates has not addressed these concerns, leaving the aviation industry to hope for a more favorable policy in the future.