AIRSPACE ON RENT

[Sadanand Bulbule]

Airlines pay fees to use a country’s airspace, also known as overflight fees. These fees are based on factors like the aircraft’s maximum take-off weight and the distance traveled. Countries essentially “rent” their airspace for passage.

Can airspace on “ rent” be included under the segment of supply of services by the Union Government for the purpose of RCM vide Entry No.5 of Notification No.13/2017-CTR dared 28/06/2017? And why?

[YAGAY andSUN]

Overflight Fees – An  Analysis in Context of Applicability of RCM under Indian GST Laws.

Introduction

Overflight fees are a significant element of international aviation economics. These are charges levied by a sovereign state on foreign aircraft that traverse its airspace without landing. While seemingly straightforward, the governance, structure, and taxation of these fees intersect with international conventions, bilateral agreements, and domestic tax laws. In India, a key area of discussion is whether these fees fall under the Reverse Charge Mechanism (RCM) under the Goods and Services Tax (GST) regime, particularly in reference to Entry No. 5 of Notification No. 13/2017 – Central Tax (Rate) dated 28th June 2017.

1. International Legal Framework

1.1 The Chicago Convention (1944)

The legal foundation for international overflight rights is embedded in the Convention on International Civil Aviation (Chicago Convention), governed by the International Civil Aviation Organization (ICAO). Notable provisions include:

• Article 1: Recognizes each state’s complete and exclusive sovereignty over the airspace above its territory.
• Article 5: Permits non-scheduled international flights to transit the airspace of a contracting state without landing, subject to the state’s rights to impose regulations and fees.
• Article 15: Allows states to impose air navigation service charges, including overflight fees, as long as they are:
  • Reasonable and non-discriminatory, and
  • Directly related to the cost of services rendered, such as air traffic control, communication, and navigation.

While the principle of freedom of overflight exists, states are entitled to recover the cost of providing services in their airspace.

2. Operational Framework of Overflight Fees

2.1 Fee Determination

Each country typically determines its overflight charges based on parameters such as:

• Aircraft Maximum Take-Off Weight (MTOW)
• Distance flown within the country’s airspace

Some regions, like Europe, manage air navigation charges collectively via specialized organizations.

2.2 Bilateral Agreements

Beyond multilateral treaties, Air Services Agreements (ASAs) between nations may outline overflight rights, fee waivers, or reciprocal arrangements. These agreements are crucial for international route access and airspace diplomacy.

2.3 ICAO’s Role

Although ICAO does not prescribe fee amounts, it publishes guidelines (e.g., Doc 9082) to ensure:

• Transparency in fee structure
• Recovery of actual service costs
• Fair treatment of airspace users

3. Country-Specific Overflight Fee Regimes

🇮🇳 India

• Permit Requirement: All foreign flights overflying Indian airspace must obtain a permit from the Directorate General of Civil Aviation (DGCA).
• Fee Collection: Charges are administered by the Airports Authority of India (AAI) and typically invoiced through IATA.
• Structure: India’s airspace is divided into four Flight Information Regions (FIRs)—each with distinct fee parameters.
• Processing: Permits are generally valid for 48 hours. Currently, no official permit processing fees are charged.

🇺🇸 United States

• The Federal Aviation Administration (FAA) imposes overflight fees based on:
  • $61.75 per 100 nautical miles (en-route)
  • $26.51 per 100 nautical miles (oceanic)
• Charges are calculated based on Great Circle Distance.
• Exemptions apply to government or military flights.

🇪🇺 European Union (EU)

• Overflight charges are centrally managed by EUROCONTROL, covering over 40 member states.
• Billing Model: A consolidated monthly invoice to airspace users.
• Cost Recovery: Based on "Service Units" considering aircraft weight and distance flown.
• In 2023, the system recovered €9.1 billion in route charges with a 99.7% collection rate.

4. Taxation of Overflight Fees under Indian GST Law

4.1 Reverse Charge Mechanism (RCM) – Legal Basis

Notification No. 13/2017 – Central Tax (Rate) under Entry No. 5 states:

"Services supplied by the Central Government, State Government, Union territory or local authority to a business entity" are taxable under RCM, except:

• Renting of immovable property,
• Services exempted under Notification No. 12/2017-CTR,
• Certain postal and port-related services.

4.2 Application to Overflight Charges

✅ Is overflight access a “supply of service”?

Yes. Under Section 7 of the CGST Act, services include granting rights or access. Overflight access involves air traffic management, safety monitoring, and communications—clearly qualifying as a taxable service.

✅ Is this service supplied by the Government?

In India, this service is rendered by the Airports Authority of India (AAI), a statutory body under the Ministry of Civil Aviation, and is generally considered an instrumentality of the Central Government.

✅ Are airlines business entities?

Yes. All commercial airlines—domestic or international—are business entities under GST.

❌ Is there any applicable exemption?

No. There is no specific exemption for overflight fees under Notification No. 12/2017-CTR. Exemptions for port or airport services pertain to ground operations, not en-route navigation.

5. Conclusion

Overflight fees charged by the Government of India (through AAI) represent a taxable supply of services to commercial airlines. Given that no specific exemption applies, and that the service is rendered by the government to a business entity, it squarely falls under RCM as per Entry No. 5 of Notification No. 13/2017-CTR.

Thus, recipient airlines are required to discharge GST under the Reverse Charge Mechanism on the overflight fee component.

6. Additional Considerations

• International Billing: In most cases, airlines receive consolidated billing via IATA or another international platform. The place of supply rules and import of services provisions under GST may apply in such scenarios.
• Nature of AAI: While AAI operates with commercial autonomy, its status as a government instrumentality supports inclusion under RCM.
• Interpretational Nuances: In the absence of direct jurisprudence, it is advisable for taxpayers to obtain legal clarity via advance rulings or CBIC circulars.

Author's Note:

The convergence of international aviation law and Indian GST provisions presents unique tax challenges. As India continues to modernize its air navigation infrastructure, clarity on taxation of such cross-border services will be crucial for compliance and policy stability.

***

[Sadanand Bulbule]

Dear Sir

An examplary explanation for unusual question. I raised this topic deliberately to decipher the wide scope of supply of services covered under RCM.  Whether such airlines are discharging the due amount of tax under RCM on receipt of subject services is to be ascertained by the GST Authorities. 
Regards 

[Sadanand Bulbule]

Dear Sir

Entry No 5 of the Notification No.13/2017 [supra] excludes some specified services supplied by the Union Government from payment of tax under RCM. Following is one of services qualifies for exemption:

(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

So does the supply of airspace to airlines on rent also cover the above services?

Plz clarify.

[Sadanand Bulbule]

In my understanding, "airspace" does not fall under the definition of the precincts of the airport, since it is beyond the physical/ground territory of the airport.

Your validation is solicited.

[YAGAY andSUN]

Your analysis is well-reasoned and touches on critical legal, operational, and fiscal dimensions. To directly address your final question:

Does the supply of airspace to airlines on rent qualify for exemption under Entry No. 5(ii) of Notification No. 13/2017-CTR?

The exemption in question reads:

"(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;"

Let’s break it down logically:

Why Overflight Fees Do Not Qualify for the Exemption

1. Nature of the Service:
   • Overflight fees are for the use of airspace and related air navigation services (like en-route ATC, surveillance, communication), which occur at high altitude — not in proximity to or within the operational control of an airport.
   • The ICAO and Indian AAI structure these fees specifically for "en-route" services, distinct from terminal or airport-based services.
2. Meaning of “Precincts of an Airport”:
   • The term “precincts” implies the geographical and functional boundaries of an airport — typically including runways, terminals, hangars, and associated ground infrastructure.
   • Indian case law and statutory interpretation principles suggest “precincts” must have physical, contiguous relation to the location (i.e., the airport), which airspace miles away does not.
3. Legislative Intent:
   • The exemption is clearly meant for ground and near-ground services like parking, loading/unloading, maintenance at hangars, terminal navigation etc.
   • Overflight access is not a “service in relation to an aircraft” within an airport environment but rather an independent aviation infrastructure service.

🔍 Supporting View from GST Law

• Section 7 of CGST Act includes “granting of right to use” as a supply of service.
• Entry No. 5 captures all government services to business entities unless specifically excluded.
• Since overflight services are not explicitly excluded and are not inside airport precincts, they fall under taxable supply and hence under RCM.

Conclusion

1. No, overflight access services (airspace usage) do not qualify under the exemption provided in Entry 5(ii) of Notification No. 13/2017-CTR.
2. They are neither inside nor functionally connected to the precincts of a port or airport, and thus are taxable under Reverse Charge Mechanism (RCM) when supplied by the Government (via AAI) to business entities like commercial airlines.

Policy & Compliance Implication

It would be prudent for GST authorities to audit and verify compliance by airlines with RCM liability on overflight charges, especially for international carriers billed via IATA.

*** 

[Sadanand Bulbule]

Dear Sir

Thank you so much for validation of my understanding. The replies are impressive and rapidly  further enhancing the quality of Discussion Forum every day, and my knowledge has been better than it has ever been before.

[VIPUL JHAVERI]

Yes, agreeded fully Sadanand ji, the way team at YAGAY and SUN is putting up quick - crisp and precise guidacne with covering all around of the matter is relly appriciable and is very helpful to all Thanks to them and requesting them, please to  keep up their active participation and also Thanks to all experts to unearth finer pointers in such valuable delibrations and Thanks also to Team TMI for providing such valauble platform 

[Ganeshan Kalyani]

So positive feedback makes the environment healthy for further interaction in discussion forum.

AI Summary

Airspace Rental Fees: GST Experts Clarify Taxation Rules for International Airlines Under RCM Mechanism A discussion forum explores the legal and tax implications of airspace rental fees for international airlines. The analysis focuses on whether overflight fees charged by government authorities qualify for Reverse Charge Mechanism (RCM) under Indian GST laws. Experts conclude that airspace usage services are taxable, as they do not fall under airport-related service exemptions and represent a supply of services by government entities to business entities.