Given the dire straits in which most airline players in India find themselves in, the budget has tried to make their lives easier. But only just. Direct imports of aviation turbine fuel (to save sales tax cost) mentioned by the Finance Minister was allowed some time back. There is scepticism though whether the measure is operationally viable.
The key relief for airline companies in the budget is the permission to avail external commercial borrowings (ECBs) for working capital requirements. ECBs come at cheaper rates than domestic borrowings.
This could ease the interest cost pressure on highly leveraged airline players such as Air India, Kingfisher Airlines and Jet Airways, who could refinance their high-cost working capital loans at cheaper rates. However, the conditions regarding the industry's ECBs being for a period of one year, and subject to a total ceiling of $1 billion (around Rs 5,000 crore) would restrict the benefit.
The Economic Survey 2011-12 has pointed out the high level of indebtedness ($20 billion) of the Indian airline sector. Half of this pertains to working capital loans to airport operators and fuel expenses. In this context, the $1 billion limit seems insufficient.
The budget has also reduced the rate of withholding tax on ECB interest payments from 20 per cent to 5 per cent for three years. This benefit, available for certain stressed infrastructure sectors including airlines, would help airline operators to access cheap funding.
Other benefits provided include the exemption from basic customs duty on aircraft parts and testing equipment imported for maintenance, repair and overhaul (MRO) operations. The exemption from basic customs duty and excise duty of new and retreaded aircraft tyres would also reduce costs for the sector.
The big disappointment though was the absence of a concrete proposal to allow the much-awaited investment of up to 49 per cent by foreign airlines in Indian airline companies. While the Finance Minister did mention that the proposal is under ‘active consideration', this provides little comfort for players such as Kingfisher Airlines which is in urgent need of funds.
The budget has also made changes to the dual rate structure of service tax on air travel. The maximum service tax of Rs 150 (for domestic travel) and Rs 750 (for international travel) in case of economy class travel has been replaced by an ad valorem rate of 12 per cent. Though abatement of 60 per cent on the service tax is available, the revised structure could make air travel costlier.
The market was not enthused with the budget proposals and the stocks of all the listed airlines (Jet, Kingfisher and SpiceJet) ended lower in Friday's trade.