Russia floats shifting domestic VAT to international flights

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Russian transport authorities have suggested boosting domestic air services by exempting them from value-added tax at the expense of increased levies on international flights.

In a memorandum submitted to the government, the transport ministry says that lifting VAT could enable carriers to reduce fares on domestic routes by at least 7.6%, which should help make air travel more affordable.

Exempting domestic flights from VAT, however, would incur an annual loss of around Rb32 billion ($1.08 billion) for the state treasury. The ministry admits that it will be difficult to make up that shortfall under the current tax legislation in the short term.

It has proposed to impose an extra fee on outbound cross-border flights in the form of a country departure tax regardless of whether they are conducted by domestic or foreign airlines.

While the finance ministry has accepted the scheme for close scrutiny, the ministry of economic development is already sceptical about its viability.

At a Russian air transport operators' association hearing, a ministry representative said there were no guarantees that domestic airlines would respond with immediate fare reductions.

He added: "The mere idea of lifting the VAT selectively is half-baked. You could expect other industries to start requesting this as well."

The economic development ministry advocates subsidising economy-class fares on long-haul routes to and from remote regions as well as within them. A uniform system of reimbursing domestic airlines for transporting particular categories of passengers on these services has been in place since 2008, said a ministry spokesman, and there is no valid reason to abandon it at this point.