Hope Amid Despair

The wish-list from the industry for Union Budget 2013-14 was undoubtedly long. With the expectations of the aviation industry fulfilled only partially, it appears that the year ahead will be challenging. However, despite the adversities, the aviation industry is hoping for a turnaround.

India has huge potential for growth in the civil aviation industry. Entry of private players progressively into every sector of the industry heralds the emergence of an open, liberal and investment-friendly environment. However, the main pillars of the aviation industry, namely the scheduled airlines and non-scheduled operators continue to be non-profitable; some in fact, are struggling to survive. Airport infrastructure in the country remains inadequate, aircraft manufacturing facilities in the civil sector are non-existent as also maintenance, repair and overhaul (MRO) facilities are grossly underdeveloped. Yet globally, India currently ranks ninth and as per the Ministry of Civil Aviation, it aims to be among the top three by 2020. With its contribution to GDP at a mere one per cent, the aviation industry in India is still a fledgling sector and requires strong government support for it to grow.

Union Budget 2012-13

The Union Budget 2012-13 and the concurrent policy changes had delivered several incentives to an ailing aviation industry ushering in a ray of hope. The major proposals were firstly, permission for external commercial borrowings (ECB) as working capital of the airline for one year limited to $1 billion ( Rs. 5,500 crore). As per the Ministry of Finance, this was to address the immediate concerns of the civil aviation sector in financial crisis. Secondly, to reduce the cost of aviation turbine fuel (ATF), which largely contributes to the high operating cost of the civil aviation sector, the government permitted import of ATF by Indian carriers. Thirdly, a proposal to allow 49 per cent equity participation through foreign direct investment (FDI) by foreign airlines was under consideration.

However, despite these measures, under the pressure of mounting losses and increasing debt burden, Kingfisher Airlines could not survive. Some airlines have evinced interest in FDI but no deal has yet been finalised. Instead of investing in the existing carriers, AirAsia is entering the fray jointly with the Tatas. Investors are hesitant owing to high taxes, poor infrastructure and unfriendly regulations that render conducting business in India difficult. Sectors such as maintenance repair and overhaul (MRO), aircraft manufacturing, general aviation and cargo, where the potential is high enough to make India shine in aviation, are neglected by the government.

Expectation from Budget 2013-14

The civil aviation industry had expectations from the budget this year that would facilitate higher growth rate and a more businessfriendly environment. On top of the wish-list was relief for the highly competitive MRO sector languishing under the crushing burden of high tax structure. Expectations included exemption of customs duty, service tax and countervailing duty on aircraft test equipment, tyres and spares as also exemption from airport royalties for start-up companies for a specified period. With the right incentives, the MRO sector can grow rapidly, provide greater employment opportunities and contribute to GDP.

Another issue was the price of ATF which is much too high even after direct import and continues to constitute nearly 50 per cent of operating cost for the domestic airlines vis-à-vis 25 per cent globally. Direct import of ATF by Indian carriers did not prove viable due to lack of their own storage and transportation facilities as these belong to the oil companies. Individual states need to reduce sales taxes which are as high as 30 per cent in some states. Another demand has been to notify ATF as “declared goods” and for it to be brought under GST.

There is a need to reduce service tax on air tickets to at least 10 per cent from the current 12 per cent in order to reduce the tax burden on passengers thereby helping the ailing aviation industry. Also, the removal of fringe benefit tax on stay of airline crew in hotels and free tickets could bring relief to the airlines.

To encourage foreign carriers to invest, there is a need to increase the FDI limit to 74 per cent. Funds need to be allocated to promote regional connectivity, a segment that holds the greatest promise for the industry. Also, the airline industry needs to be given infrastructure status for it to be eligible for tax relief as well as attract investment. As part of the air ticket, the airline collects “passenger service fee” which has facilitation and security components. The facilitation component is revenue for the airport operator. The security component is held by the airport operator in fiduciary capacity in an escrow account on behalf of the Central Government and does not form part of the airport operator’s revenue. However, the surplus amount in the escrow account is regarded as income for airport operators and taxed accordingly—an anomaly that needs to be removed.

As per the Income Tax Act, airlines have to incur additional costs arising out of withholding tax on maintenance related payments towards labour charges and fees for technical services and royalties. These provisions need to be withdrawn and such payments allowed without deduction of tax at source.

Infrastructure development is a pre-requisite for the growth and development of any country. This involves creation of new infrastructure or upgradation including capacity enhancement of existing infrastructure. Both entail huge investment and as such, amendment is warranted in the Act such that upgrade of existing infrastructure is eligible for the benefit of Section 80-IA of the Act.

Airport infrastructure requires ancillary and support services such as fuel farms, vehicle parking areas and cargo handling facility. In the absence of a clear definition of an ‘Airport’ under the present section 80-IA of the Act, there is ambiguity as to whether or not these services enjoy the benefits thereunder. There is a requirement to extend the benefits under section 80-IA of the Act to the ancillary and support services as well. As per the current provisions, deduction is available to an enterprise if it has entered into an agreement with the Central or state government or other authorities prescribed in the section. It needs to be stipulated that the agreement between the subcontractor and the main concessionaire for carrying out ancillary activities be deemed as an agreement between the subcontractor and the government. Infrastructure for general aviation, including helicopter operations should be given special attention to promote charter services and medical/emergency services.

The investment-friendly move by the Indian Government to privatise airports has been quite successful. Apart from better infrastructure, it has enhanced revenues substantially, has helped airlines to grow, has created employment opportunities and contributed to GDP. Further privatisation will make the industry more competitive, raising standards and lowering prices. Private airport operators should also be permitted to issue tax-free infrastructure bonds to raise funds.

Specialised equipment for airport security as also a wide range of other high technology equipment required for installation at airports, are not imported by the respective government agencies but by the airport operators, who under the existing regulations, are not entitled to duty concession even though imports are financed from public funds. Regulations in this regard need to be amended to provide duty concession for import of specialised equipment by respective airport operators. The government should consider privatising air traffic control (ATC) to improve efficiency.

Duty on aircraft imported for non-scheduled operations is 2.5 per cent whereas it is 18.5 per cent for aircraft imported for private use. Aircraft imported for scheduled operations and for government use are exempted from import duty. The duty structure needs to be rationalised and reduced to promote business and general aviation and obviate malpractices.

It is also desirable that Section 72A of the Income Tax Act with “provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger” be amended to extend the benefits therein to the entire airline industry and not only to public sector companies with a view to providing the private airlines operators a level playing field as well as sustaining the current growth of the civil aviation sector. A special mechanism is required for easing cash flows arising from delayed receivables from government entities such as Air India. There is an immediate need to set up an Aviation Finance Corporation (AFC), a special purpose vehicle to provide dedicated capital with lower interest rates and longer maturity period of loans.

Does Budget 2013-14 Meet Industry Expectations?

The wish-list from the industry for Budget 2013-14 was undoubtedly long. Some of the expectations have been considered but many did not find a place in the budget. Some provisions of the budget that directly impact the aviation sector are as follows:

One important item on the wish-list that has been given some space is maintenance repair and overhaul (MRO). As the Finance Minister said, “The MRO industry is at a nascent stage. Encouraging the MRO sector will generate employment besides other benefits. Hence, I propose to provide certain concessions to the MRO industry.” This gesture by the government will benefit Air India and GMR infrastructure operators of MRO facilities at Mumbai, Delhi and Hyderabad. Currently, the basic customs duty exemption is available to spares and test equipment imported for MRO. The time period for consumption/installation of spares and test equipment imported for MRO is being extended from three months to one year.

Corporate tax surcharge has been increased from five to ten per cent for domestic companies whose annual taxable income exceeds Rs. 10 crore. In the case of foreign companies that pay a higher rate of corporate tax, the surcharge will increase from two to five per cent. The aviation sector is relatively young and no airline has earned profit during the last seven years. This provision thus is irrelevant for the aviation sector.

Section 29 of the Customs Act 1962 is being amended to permit landing of aircraft at any place other than customs airports. International passengers are to benefit from amendments to rules pertaining to baggage. In case of a male passenger who has been residing abroad for over a year or is on transfer of residence to India, the raise in duty-free allowance on jewelry is from Rs. 10,000 to Rs. 50,000 and for a lady passenger, it is from Rs. 20,000 to Rs. 1,00,000. Also, the duty free allowance for crew members has been raised from Rs. 600 to Rs. 1,500. Unfortunately, the budget has failed to address the major issues related to the aviation industry.

In particular, there was no mention of hoped-for-fiscal support for India’s struggling airline industry in the budget document. The aviation sector in India needs special attention in respect of fiscal provisions and assistance. With the expectations of the aviation industry fulfilled only partially, it appears that the year ahead will be challenging. However, despite the adversities, the aviation industry is hoping for a turnaround. Undoubtedly, the government needs to do much more for the revival of the industry.