The service tax department has frozen the bank accounts of Air India and Kingfisher Airlines for non-payment of dues. This shows the extent of cash crunch the aviation industry is facing, making defaults in payment almost routine.

While the state-run carrier has dues of Rs 170 crore, the Vijay Mallya-promoted airline has to pay 100 crore as service tax liability.

Air India chairman and managing director Rohit Nandan told ET that Air India paid 85 crore on Thursday and expects its account to be de-frozen now. Kingfisher, however, refused comment on the matter.

A company cannot operate any of its bank accounts or write a cheque if its accounts are frozen until recoveries are made. Tax experts say a freeze on bank accounts is a standard procedure when statutory dues are not paid by assesees despite notices being served to them.

"Freezing of accounts will not happen just because of non-payment of past two months' dues; there must have been a pattern of default by the companies," said Ramesh Vaidyanathan, partner, Advaya Legal.

Kingfisher, India's third largest airline, which has not paid salaries to a part of its 7,000-strong workforce for over two months now, is already operating on a daily cash clearance basis of Rs 50 lakh at the Mumbai airport, where it owes authorities Rs 90 crore for aeronautical service charges.

It could not be ascertained whether the service tax authorities had ordered any recovery of dues from Kingfisher yet or if the airline had approached authorities seeking relief.

Experts said recovery of dues could happen either through sale of assets or by auctioning real estate. "The recovery process comes under the Revenue and Land Arrears Act. One option with the authorities is to auction fixed assets, which is a long drawn process; the other way is if the company is under serious financial duress it can make a representation to the government and seek relief," said Sachin Menon, partner and head, indirect tax, KPMG.

Kingfisher is currently seeking capital from banks after its debt of more than Rs 6,500 crore was restructured last year by a consortium of banks, an exercise that gave the lenders 23% shareholding in the beleaguered airline.

However, experts said tax authorities have been unusually active at this time of the year. "Tax authorities become more active towards March. This year they are under pressure as there is a huge shortfall in the budget estimates of last year and now. The move is to mop up the maximum in service tax dues," Menon said.

Airlines have to deposit service tax of 10.3% they collect from ticket sales or any other value-added service they offer with the government. Last year's budget had brought the domestic economy class travel under the taxable service umbrella due to which the airlines had to bear an additional tax burden.

In the past, Jet Airways' low-cost subsidiary, JetLite, was also involved in a tussle over service tax; it had to contest a demand of Rs 257 crore and interest in the courts which went in its favour in 2010. It also got a favorable decision in a case in which it was asked to pay Rs 128 crore as service tax and an equal amount in penalty for display of logo under its business auxiliary services.
(With inputs from Anindya Updhyay Economic Times.)