Budget 2014-15: Wish-List for Civil Aviation

Issue: 3 / 2014By B.K. PandeyPhoto(s): By SP Guide Pubns

Indian civil aviation sector expects from the NDA Government the attention it rightly deserves

The NDA government headed by Prime Minister Narendra Modi must be currently preoccupied with formulating a national budget for the financial year 2014-15 that is expected to address the multifarious and complex problems facing the country. A majority of the issues confronting the Modi Government today have been inherited from the UPA regime and are rooted in the economic ills perpetuated over the last decade. While every sector of the economy would be vying for its share of the pie, one that is relatively new on the scene but nevertheless critical for the well-being and economic growth of the nation, i.e. the civil aviation industry, ought to be given by the Modi Government the attention it deserves.

The Indian civil aviation industry of consequence is just a decade old and since its emergence on the Indian scene has been constantly engaged in a desperate struggle for survival. In fact it is somewhat difficult to understand how the civil aviation industry in India continues to remain afloat in a financially hostile environment. Hopefully the NDA Government will focus on the plight of this segment of the Indian industry and adopt the necessary measures to pull it out of the morass so that it is able to make a meaningful contribution to the national economy.

Rationalisat ion of ATF Prices

The slew of measures the NDA Government could consider are wide ranging. However, the aim here is to focus primarily on some of the aspects related to the economics of the civil aviation industry. First and foremost is the price a scheduled or non-scheduled operator, a charter company or even a private operator of a business jet pays for the aviation turbine fuel (ATF) uplifted in India for the aircraft. For an airline, ATF accounts for nearly 50 per cent of its operating cost. According to industry estimates, the ATF sold in India is nearly 50 to 60 per cent higher in cost than anywhere else in the world primarily on account of multiple taxes imposed by the central and the state governments. The levies under various heads imposed by the Central Government on ATF totals up to 35 per cent of the basic cost. In addition, sales tax is charged by the state governments that are not uniform and vary sharply from state to state ranging from three per cent to 34 per cent. Overall an airline would end up paying around 70 per cent of the basic cost of fuel as tax. This is clearly exorbitant, unaffordable and crippling for the civil aviation industry in India. The government should consider bringing the tax leviels down to reasonable levels, possibly at four per cent and made uniformly applicable throughout the country. ATF may be reclassified and placed under “Declared Goods” category to facilitate uniformity in sales tax.

Exorbitant Levies

The airlines also hope that the government will exempt customs duty on import of aircraft engines. Such exemption was in vogue till 2012 when it was withdrawn. The maintenance, repair and overhaul (MRO) activity pertaining to commercial aircraft also suffers from high rates of taxation. Such a high tax regime that includes service tax at the rate of 12.36 per cent together with value added tax at 12.5 to 15 per cent has made the Indian MRO facility in India 30 per cent more expensive compared to that available in other countries such as Singapore and even Sri Lanka. Indian carriers would rather avail of MRO facility abroad than at home. There is clearly a crying need to modify the tax regime in respect of Indian MRO industry to make it attractive for domestic carriers and competitive internationally.

Section 10 (15-A) of the Income Tax Act 1961, which exempted airlines from levy of income tax on aircraft lease rentals issued by foreign lessors, was withdrawn in 2007 and withholding tax imposed. This has created enormous difficulties for the aircraft leasing industry. The relevant section of the Income Tax Act should be restored to provide the badly needed relief to the cash-strapped industry. Service tax has been imposed on passenger service fee (PSF) collected by airlines on behalf of the airport operators. Recovery of PSF should not be subject to service tax as it was not being charged towards services of air transportation provided by the airlines.

Compared to airports abroad, airport charges in India that include landing and parking charges are inordinately high on account of which not only do foreign carriers are inclined to shy away from the Indian skies, but even the Indian carriers find the financial burden unbearable. It would be desirable to levy airport charges that are reasonable and internationally competitive to make operations to India sufficiently attractive financially. Indian airports generally aim to rake in returns to the tune of 16 per cent on their investments. This is in jarring contrast to the wafer-thin margins of one per cent that airlines globally operate on. There is certainly a need to correct this gross imbalance.

Regional Connectivity

To improve regional connectivity and extend the facility of aviation to remote and other areas not easily accessible by other means of transportation, there is a strong case for construction of a large number of regional airports as well as enhance capacity of the major airports for the hub-and-spoke model to be effective. Compared to the 500 airports that India has, there are over 15,000 airports in the United States which has a population one-fourth of that in India. Besides, the reduction or even waver of airport charges at the regional airports will provide the much needed impetus to regional aviation and in turn boost the flagging domestic aviation industry. Currently, operations to the smaller airports are unprofitable adding to the losses airlines incur on account of other factors such as high cost of ATF and expensive airport usage fees. Airlines thus have no incentive to expand their fleets and extend operations to remote areas.

Stunted Growth

On account of the crushing burden of taxes and levies, growth of the civil aviation industry in India remains stunted. Indonesian carriers operate over 500 airliners and have around 750 on order. Compare this with India that has a population five times that of Indonesia, where Indian carriers fly around 400 airliners and have 470 on order.