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 Mathur and Manika Girotra, Walker Chandiok & Co, contributed
to the article.
More than just direct import, aviation turbine fuel should be
categorised "declared goods" to curb tax costs and ensure uniform
rates across States.
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