It is a common practice in the airline industry to enter into code share or interline arrangements. These provide a leverage to airlines to sell tickets for transportation in those geographical areas where such airlines may not have physical operations.

A peculiar feature under these arrangements is that the airline selling tickets to passengers may not be having operations on a particular route. However, by entering into a code share arrangement, airlines are able to sell tickets to its passengers for flying on the routes on which they may not have operations. For illustration, say airlines ‘A’ operates on Delhi-Mumbai

route in India and a foreign Airlines, say ‘B’ operates on Mumbai-Sydney route. By entering code share/interline arrangements, B is able to sell tickets for a journey from Delhi to Sydney and vice versa. The passenger is issued a single ticket by B for the journey involving two carriers A and B. By operating under the code share arrangement, the operations of B are not restricted to the route Mumbai to Delhi. The entire ticket fare is collected by B. Thereafter, A is typically given an agreed share of fare by B.

Such code share arrangements benefit the airlines and the customer as well. On the one hand, while the airlines benefit from increased customer base and are able to connect more destinations in its portfolio, the customers are benefitted as they are saved from the hassles of purchasing tickets from different airlines for the journey.

Although, under the above arrangements, passengers may have a seamless experience, the same cannot be said for airlines which are facing ambiguity regarding GST on the amount shared between the airlines. It is worth noting that the airline issuing the ticket may have charged GST on the entire ticket fare collected for the flights embarking from India. However, there is ambiguity concerning the taxation of sharing of revenue between the airlines which is generated from ticket fare which is already taxed. The complexity in analysing the GST implications arises particularly for the reason that for one single journey undertaken jointly by two different carriers, the revenue generated from the journey may be taxed twice, once at the time of issuance of ticket and yet again, at the time of sharing of revenue between the airlines.

It is highlighted that disputes regarding taxation of revenue sharing is not a novel area of dispute under taxation. In the past as well, there has been ambiguity and disputes on taxation of revenue sharing in different industries.

For instance, under the erstwhile service tax regime, CBIC had issued clarification on this issue in the context of the levy of service tax on revenue shared between theatre owners and distributors. It was clarified that the revenue sharing arrangement between the theatre owner and the distributor is not covered under service tax. 

While the code share arrangement is comparable to the revenue sharing arrangement, the ambiguity continues in the absence of issuance of any specific clarification by CBIC or any specific judgments by Courts/Tribunals on the issue.

In recent years, India has witnessed significant growth in the aviation industry and the Government of India also seems to be determined to boost the aviation industry by development of airports in small towns in schemes like regional connectivity schemes and ‘Ude Desh ka Aam Nagarik’ (UDAN) scheme. However, the ambiguity of taxation of codeshare/interline arrangements may pose a barrier in achieving such objectives as increased taxation may impact financial health of the sector and attractiveness of aviation business in India.

We may also take note of the fact that to boost the economy or a particular sector, the Government in the past has not hesitated from relinquishing its part of revenue from taxation by giving relief to specific sectors. One recent development worth discussing at this point is the impetus given to the insurance sector by doing away with taxation of revenue shared between two different insurance companies in co-insurance and reinsurance transactions. In order to give relief to the insurance industry transactions between insurer and co-insurer or reinsurer have been kept out of the purview of GST.

It is to be noted that on a principle level there may be various similarities between codeshare/interline arrangement in the aviation industry and the transaction between insurance companies. For instance, under coinsurance and reinsurance arrangements, the invoices are issued to the customer by only one insurer i.e. the lead insurer and thereafter the amount received from the customer is shared between the insurers. In these transactions, the insurer and the co-insurer or reinsurer as the case may be, provide insurance services in the same arrangement. Similarly, in code share or interline arrangement, the tickets to the customers are issued by one airlines (marketing or ticketing airlines) and thereafter, there is sharing of revenue
between the airlines for services jointly rendered by both the airlines.Despite the stark similarities between the insurance sector and aviation sector, there is no specific relief given as of now to the aviation industry. Whether the Government takes note of such issues in the near future in continuation of its objective of giving a boost to the aviation sector is a space to watch out for.
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Code share arrangements between airlines: A case fit to tax?