Taxation Travails for Indian Carriers

The Indian aviation industry seems to be on the verge of realising its latent potential to claim the third position in the world. It cannot be denied that even the current government is doing everything to provide the right impetus. From proposing the normative approach to modify airport charges, planning 200 greenfield airports, curtailing state taxes on aviation turbine fuel (ATF) to the recent draft modification of the Route Dispersal Guidelines (RDG), the effort is noticeable.

India’s largest airline by market share, IndiGo, dominating at 36 per cent, is leasing more and more planes to counter the threat of new entrants such as Vistara and AirAsia India. IndiGo has joined the list of Indian carriers with hundred plus fleet size that earlier consisted of just two, i.e. Air India and Jet Airways with 129 and 104 aircraft respectively, with the next competitor SpiceJet, far behind with 34 down from 57 earlier, GoAir with 19 with a further ambitious order of 430.

As per Boeing’s long-term forecast, in the next two decades Indian carriers would be taking deliveries of 1,450 aircraft valued at about $175 billion. The growth potential of the Indian industry can be gauged by these bold expansion plans with surmounting fleet orders and the increasing bilateral requests from the foreign carriers flying into India such as Emirates, Etihad Airways, Qatar Airways, Singapore International Airlines (SIA) and Turkish Airlines among others.

Plethora of Taxes

The more the Indian skies get filled with aircraft, greater is the requirement to optimise the aircraft tax regime to facilitate long-term sustainability. Aircraft taxation exists all around the world in different forms. In the European Union (EU), there is air passenger duty in the UK, departure tax in Spain, civil aviation tax in France, Danish transportation tax in Denmark and city council tax in Italy. But in India, the focus is on taxes specific to aircraft. The following categories of taxes have been observed prevailing at many of the world’s airports that majorly burden the aircraft operators and passengers:

• Noise-related Tax: This is levied in sync with the airport noise management plan only at those airports where noise problem exists. Although aircraft being manufactured today are 75 per cent quieter than 50 years ago, under pressure from the community, airports resort to such tax or night curfew.
• Solidarity Tax: This is based on the logic that air transport is a luxury. France was the first to introduce such a tax in 2006, notwithstanding the fact that typically a ten per cent increase in price of air travel decreases the demand by 15 per cent.
• Value Added Tax (VAT): International and domestic carriers are obligated to comply with the VAT requirement of any country.
• Tax on ATF: Taxes levied on ATF that varies from country to country or even city to city on account of market dynamics and taxation framework.
• Taxes on Spares: This tax is related to the country of manufacture of aircraft spares and its existing regulatory framework.
• Landing Charges: This levy varies with the weight of the aircraft.

Currently, 16 major airports in India that handle more than 1.5 million passengers annually are regulated by the Airport Economic Regulatory Authority (AERA). These airports are at Delhi, Mumbai, Hyderabad, Bengaluru, Kochi, Chennai, Kolkata, Jaipur, Ahmedabad, Lucknow, Guwahati, Calicut, Thiruvanathapuram, Goa, Srinagar and Pune. All the rest are regulated by the Ministry of Civil Aviation (MoCA) under the Aircrafts Act of 1934.

Aeronautical charges at airports are categorised as route navigation facility charges (RNFC), terminal navigation landing charges (TNLC) and airport service charge that includes landing and parking charges, user development fee (UDF) and passenger service fee (PSF). The landing charges are typically based on the weight of the aircraft type while the navigation charges are based on the weight and distance flown by the aircraft.

At the major airports at Chennai and Kolkata, there is a minimum landing charge of Rs. 5,000 irrespective of the aircraft’s weight and at Thiruvanathapuram, a minimum charge of Rs. 1,100 but with a full waiver for aircraft with less than 80 seats. For increasing connectivity in the North East Region (NER), there is no minimum charge even at major airports like Guwahati. At other airports, there is full waiver of taxes for less than 80-seater aircraft.

At some of the top airports in Asia, there is a flexible taxation mechanism which is conducive to aviation growth. Incheon airport at Seoul in South Korea, in an aggressive marketing campaign, discounted the landing fees for new carriers by 100 per cent in 2012, 75 per cent in the second year and 50 per cent in the third. Hong Kong airport decided to continue the long-standing discount of 15 per cent on landing and parking charges safeguarding a $43 million savings for the airlines.

Changi airport in Singapore has an off-peak discount of 40 per cent on landing charges for flights arriving or departing between 0200 to 0600 hours of the same day. These mechanisms enable the airports to optimise the demand elasticity of air traffic. On the contrary from 2012 to 2014, there was an increase in airport charges at Delhi by 345 per cent that resulted in thwarting growth in passenger traffic by only 4.9 per cent in domestic and 7.8 per cent in international travel.

Tax on ATF

ATF constitutes between 40 and 50 per cent of operating costs of domestic carriers in India as also the Asian airlines as against the global average of 30 per cent. ATF is burdened by a cascading tax structure which includes customs duty of five per cent, excise duty of eight per cent and sales tax of around 30 to 35 per cent. To boost air traffic sales tax has been reduced by some of the state governments. Sales tax in Punjab is 6.05 per cent; in Odisha and Chhattisgarh, it is five per cent; in Madhya Pradesh and Jharkhand, it is four per cent and in Andhra Pradesh, it is only one per cent.

However, sales tax levied at the major hubs are very high. For example, at Delhi, it is 20 per cent while at Mumbai, it is 25 per cent and at Chennai, it is 29 per cent. Apart from airport charges and tax on ATF, there is a service tax charged at the rate of 4.95 per cent of the base fare of the ticket, which further burdens the passengers and in turn, the airlines. These widely varying rates would not be a solution to the problem. Between October 2014 and January 2015, the international prices of Brent crude, from which ATF is derived, dropped by 57 per cent. In the wake of this development, airlines in Asia such as Japan Airlines, AirAsia, Qantas and Virgin Atlantic among others have decided to remove fuel surcharge. Some other initiatives are also in pipeline. For example, Qantas would be cutting the cost for redeeming flights in its frequent flyer programme as part of a wider global move to absorb fuel prices in base fares.

The commercial aviation industry is growing faster in Asia than in the West. The Asian carriers on an average, hedge fuel lesser than their US and European counterparts, below an average of 50 per cent. This practice in a way allowed the Asian carriers to benefit from the spot prices. In the previous budget 2013-14, the Indian Government allowed the airlines to directly import ATF, but due to lack of storage infrastructure, this could not be implemented to any appreciable extent.

In early January this year, ATF prices were cut by the oil marketing companies by a steep 12.5 per cent and on February 1, 2015 by another 11.3 per cent. However, these have not yet had noticeable impact on air fares.

Maintenance Repair and Overhaul (MRO)

The Indian MRO industry is expected to triple in size from Rs. 2,250 crore in 2010 to Rs. 7,000 crore in 2020. Currently, the MRO industry in the UAE is worth Rs. 8,000 crore and in China, it is Rs. 10,000 crore. Typically, an aircraft is made up of 3,000 small, medium and large spare parts. When a service centre imports aircraft parts into India, it is first required to pay an import duty of around 20 to 25 per cent. When these spare parts are sold to an aircraft operator, sales tax and VAT of around 10 to 13 per cent is levied on the transaction.

On top of that, there is an octroi of four per cent. If an aircraft operator imports the spare parts directly, they escape the sales tax and just pay the import duty. That is why the MRO or service centres do not prefer maintaining huge stocks of the spare parts. Even the import duty levied is not at all a nominal amount.

At present, the airlines in India outsource major checks of aircraft to MRO hubs in Singapore, Malaysia, South Korea, China, Japan and Dubai. India’s MRO tax structure is 40 to 50 per cent higher than the global average. Servicing an aircraft in India entails a service tax of 10.36 per cent which is levied in MRO centres abroad. For example, while a “C check” which is carried out every 18 months, on an Airbus A320 would cost Rs. 2 crore abroad whereas in India it would cost Rs. 3 crore. The Indian MROs, unable to absorb these differential taxes, pass it on to the aircraft operators resulting on greater financial burden for them.

Policy for Regional Carriers

The rationality of taxation for the regional carriers needs review. The 16 regional carriers that are to come up in the near future have the potential to spur the growth of air traffic in Tier-II and Tier-III cities. The current system imposes additional tax on aircraft that have more than 80 seats. As stated earlier, the exemption of minimum landing charges are still not applicable at some upcoming metro hubs such as Chennai and Kolkata, which has great potential for regional connectivity.

The regional carriers that operate mainly the ATRs, Bombardiers and of late, Embraers, offer 40 to 110 seats on their aircraft. The cap of 80 seats for lower taxes makes it uneconomical for these carriers to break-even. If the cap is raised to a capacity of 149 seats with the referred tax exemption particularly on routes connecting Tier-II and Tier-III cities, it could be much more lucrative for the start-up carriers to attain economies of scale as utilisation of aircraft up to 149 seats would be optimal.

Currently, 97 per cent of the Indian population is untouched by air travel. The Tier-II and Tier-III cities hold a chunk of such traffic. The need of the hour is to formulate a separate taxation policy for the regional carriers that would be in harmony with their operational dynamics.