Budget 2010: Depressing

If Budget 2009 was a damp squib for the civil aviation industry, Budget 2010 introduced provisions that would traumatise an industry recovering from the financial distress of the year gone by

The economic survey prior to the presentation of the Budget in February 2009 observed that “profitability of the domestic air¬line industry is under tremendous pressure as almost all airline operators in the country are reported to be making losses.” There was also allusion by the President in her budget speech to “an unprecedented boom in the civil aviation sector and the speedy increase in passenger and cargo traffic”. However, Budget 2009 was a big disappointment to the aviation industry in the year gone by. In the 187 long-winded paragraphs of the budget speech there was only one sentence about civil aviation, which also did not concern the air traveller, instead it referred to the import of helicopter simulators. Expectations of the aviation industry from Budget 2010 remained largely unfulfilled by the Finance Minister.

If Budget 2009 was a damp squib for the Civil Aviation industry, Budget 2010 went a step further and introduced provisions that would traumatise an industry struggling to recover from the financial distress of the year gone by.

Service Tax

The first blow for the industry after the fine print had been deciphered was the imposition of service tax on air travel. Till date levied only on international travel in business and first class, applicability of service tax of 10 per cent under Air Passenger Transport Service, Section 65 (105), has now been expanded to include both domestic and international travel in any class. The relevant text of the Finance Bill in effect states that such tax rate will be levied on services rendered to all passengers by an aircraft operator in relation to scheduled or non-scheduled air transport for both domestic and international travel. Thankfully, this expansion of the service tax regime is only applicable to the basic fare and not to surcharge. As the basic fare is on an average about 40 per cent of the total amount a passenger pays to fly, the additional burden would be roughly four per cent of the total fare. This figure is still substantial in proportion to the total air fare chargeable to the passenger and it is highly unlikely that airlines will absorb the newly introduced tax. If the iterations being made by the charioteers of the industry are to be paid attention to, the new service tax would be passed on the customer from the day it becomes effective. Airlines plan to charge even those customers who may have purchased their tickets before the service tax was included in their fare structure but are actually traveling on or after the date the new levy is effective.

The budget also went on to broaden the base of services which would now fall under the ambit of service tax resulting in additional financial burden on airports. All services provided to passengers, importers/exporters and airlines at airports now have the service tax levied on them. However, the definition of the taxable services, namely the airport services under Section 65 (105), are being amended to state that all services provided within the airport premises would fall under this category and an authorisation from the airport authority would not be a precondition for taxing these services. Needless to say, the airports will find a way of passing the additional burden to the airlines which in turn will pass it on to the passenger. Saddled with heavy cumulative losses, no airline is currently in a position to absorb additional financial burden.

Fuel Cost

Fuel costs account for about 45 per cent of an airline’s operating costs. One of the long standing demands of the aviation industry has been to bring aviation turbine fuel (ATF) under the declared goods category thus rationalising the sales tax figure across the country to a uniform four per cent. At present sales tax charged by states ranges from 4-32 per cent. The cost of ATF in India is around 60 per cent higher than the average international level. Thus there is constant refrain of the industry to ease the burden on the airlines and in turn, on the air passengers. The other demand has been to reduce the excise duty on aviation fuel which again, is exorbitant. Instead of addressing these issues, the Finance Minister has proposed a five per cent customs duty on crude oil rendering ATF even more expensive with consequent impact on air fares. It is pertinent to state that there was no such duty on crude so far.

Perhaps the worst affected will be the flying training segment of general aviation that employs piston engine aircraft. These operate on 100 LL Avgas which is more than twice as expensive as ATF used by jet liners. The per barrel cost of crude itself has steadily risen from its lowest of around $40 (Rs 1,817) to the current level of around $80 (Rs 3,634). With a recovery in global economies on the way and a consequent rise in demand for oil products, crude prices may be expected to travel northwards, exacerbating the woes of the airlines.