Indian aviation, the ninth largest market in the world, has significantly contributed to business, trade and tourism growth in the past decade.

The paradox of the sector, which serves one of the world’s fastest growing economies and registered unprecedented growth in traffic, is that almost all Indian carriers are in the red.

Transportation is one of the most important wheels of growth in any economy, and air travel is no longer an elitist luxury but a necessity. The sector has been impacted by several factors including high operating costs fuelled by high oil and tax cost, cash crunch and soaring debts.

Recently, the Government opened up FDI in Indian carriers to foreign airlines and also allowed direct import of aviation turbine fuel (ATF).

Responding to this, R. Neelakantan, Chief Financial Officer, SpiceJet said, “Permitting FDI by foreign airlines was a right step for Indian aviation, as it requires resources for expansion to connect Tier II and III cities with metros and foreign destinations. Further, the Government has been proactive in helping the industry directly import the required ATF.”

He added that FDI would lead to an increase in the fleet strength of several airlines.

However, these moves may not be enough to address the fundamental problems facing the industry.

High ATF prices

The saving of sales tax on import of ATF is an attractive proposition for airlines. However, they have to use the existing infrastructure of the oil marketing companies (OMC). As India is an ATF-surplus country, direct import by airlines would necessitate finding new export markets for the OMC’s surplus stock.

Direct import merely involves remodelling the transaction to overcome high sales tax (20-23 per cent) as the user and logistic services provider remain unchanged, and, therefore, there may be no real benefit to the economy. A more practical way out could be to categorise ATF as “declared goods” to curb tax cost and ensure a uniform rate across States.

“ATF pricing mechanism is based on import parity with a black box which currently includes irrational elements and tax on taxes. If a person travels by road or rail, he is using highly subsidised infrastructure or subsidised electricity/ diesel, thereby making a much larger hole in the exchequer. We are only requesting rationalisation of taxes,” says G.P. Gupta, Chief Administrative Officer, SpiceJet.

Heavy tax burden

According to Gupta, “A major portion of aviation losses is attributable to high taxation.” It is not just the tax, but also the tax on tax which becomes excruciating! For example, several airport operators charge fuel throughput fees from the OMCs. This throughput charge plus service tax forms part of the ATF cost on which sales tax is charged by OMCs, leading to a cascading tax effect.

Passenger Service Fee and User Development Fee, collected on behalf of the Airports Authority of India, suffer service tax thereby pushing up ticket cost, which has outpaced the spending power of customers.

Airlines depend heavily on foreign service providers; the contracts for these are net of taxes. As the Revenue department is stringent on withholding tax, whether it is coverage of income deemed to accrue in India or withholding at 20 per cent in the absence of PAN, the costs are mounting for carriers.

Tax incentives

Maintenance, repair and overhaul (MRO) form another big cost item for an airline, accentuated by the fact that MRO facilities are in their infancy in India. According to Neelakantan, “an MRO operating out of India will definitely save costs and time, apart from the outflow of valuable foreign exchange. Adequate direct and indirect tax concessions for setting up MROs will be a step in the right direction.”

Liberalisation of ECB

Unless the fundamentals of the sector are improved, carriers will face the same problems in raising debt outside India that they face domestically. “Allowing ECB (external commercial borrowings) for use of working capital has not been of much benefit for the airline industry. The collaterals to raise the required funds as well as the weakening Indian rupee did not make it particularly appealing to the industry,” says Neelakantan

The sector looks toward the Government for tax rationalisation, which most of them believe would be enough for them to soar again, and fuel the growth of the world’s most promising economy

Shweta MathurManika GirotraWalker ChandiokCocontributed to the article.

Pallavi J. Bakhru is Partner and Practice leader, Tax and Regulatory Services, Walker Chandiok & Co

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