Will the Budget provide tax relief to civil aviation sector?

AK Ramdas 25 February 2015

Once the Budget provides some tangible relief to civil aviation sector, chances are that some airlines would come forward to adopt certain airports as their own, establish their hubs, look at regional connectivity closely and help generate employment opportunities

The general feeling in the aviation sector is that the Union Budget to be presented by Finance Minister Arun Jaitley on 28th February, may provide them with some cheer, particularly on the reduction of taxes on the aviation turbine fuel (ATF). Many states levy value added tax (VAT) ranging from 4% to 30% and the industry hopes that this should be unified across the States to be not more than 3% or 4%.

Direct import of ATF is possible but the infrastructure needed to facilitate its transportation is actually dominated by the oil marketing companies (OMCs). If, as a sequel to the Budget, the Centre ensures that this infrastructure is made accessible or shareable with private airlines, which are willing to import ATF directly. This would not work to mutual advantage.

It is reported in the press that, according to Vivek Gour, MD and CEO of Air Works, the tax implications are a great burden on the maintenance, repair and overhaul (MRO) industry. He points out that the service tax amounts to 12.36% while VAT varies from 12%-15% (average) and Royalty charged by airport operators comes to 13% to 20%. He feels that the MRO industry, which can hopefully provide for employing 12,000 to 15,000 skilled workers is giving away this business opportunity to Singapore, Sri Lanka and Nepal, who can offer the facility practically 30% to 35% cheaper than their counterparts in India.

In the meantime, Karnataka State Government are trying woo Vistara to set up its hub in Bengaluru, as the Kempegowda International Airport (KIA) has already crossed the 7 million passenger traffic and is growing at a fast pace. To entice Vistara to make Bengaluru its hub, like its distant cousin, Air Asia, talks are afoot with their CEO, Phee Teik Yeoh to tackle the high incidence of sales tax on ATF.

Vistara, like Air Kerala, has also made its intent known that, whenever the Civil Aviation Ministry comes out with the new regulations, replacing the 5/20 rule, they would seriously work on taking long haul trips to the West, which, according to their study accounts for as much as 70% of outbound Indian traffic goes to West. They aim to cover flights to reach New York and Washington DC, and, presumably stop at suitable locations in Europe.

Once the Budget provides some tangible relief to this industry, chances are that some airlines would come forward to "adopt" certain airports as their "own", establish their hubs, look at regional connectivity closely and help generate employment opportunities. The Budget could also provide some extra special facilities, in terms of taxes and the like, if private airlines come forward to build low cost terminals. This will enable the low cost carriers to use them on a regular basis, and serve the purpose well.

With the recent change in the ownership of SpiceJet, the aviation industry may be able to meet the growing needs of the air travellers and any relaxation that can be given in the budget would enable the industry to overcome the tax hurdles currently faced by them.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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