By Naveen Aggarwal, Executive Director, KPMG
The Indian aviation sector has witnessed exponential growth over the
past few years. The Vision 2020 statement announced by the Ministry of
Civil Aviation, envisages and is committed to creating infrastructure
to handle about 280 million passengers by the year 2020. Through the
interim solution of cutting down domestic flights and moving them over
to international routes, the Indian aviation sector has done clever in
curbing the crisis. Further, the resilience of the Indian economy seen
in recent times is also helping reinforce a safe flight for the
country's aviation sector.
Despite the promising environment, the sector has not been insulated
from the ill-effects of the recent downturn triggered by the global
financial crisis. A consistent drop in load factors despite fare
revisions, sliding rupee vis-a vis the dollar making operational costs
sky rocket and exchange fluctuations impacting leasing and maintenance
costs are some of the factors that the industry has had to bear in
recent times. Adding to this, the inadequate infrastructure in
airports to support airlines have created a black hole in the profits
and left the companies grappling with huge losses and building debts.
To this effect, the Government needs to propel the sector to meet the
ministry's vision by implementing an investment oriented tax regime
which encourages growth and improved infrastructure.
Incentives in the form of a 10 year tax holiday are available to
infrastructure facilities (including airports) with a view to attract
investors in this space. These benefits are available for developing,
operating and maintaining any new infrastructure facility. Common
inference of this is believed to be that the term 'new infrastructure
facility' would refer to a green field project however it remains
ambigious whether the tax holiday would be available in respect of
modernization, upgradation, redevelopment of the existing airports.
Since substantial investments are being made towards upgradation of
existing airports, the issue needs to be looked into greater detail
and it may be clarified whether the tax holiday would also be
available to the developers of existing airport facilities.
On indirect tax front (excise/ custom duties/ VAT), it would be a
reasonable aspiration for the sector to expect some tax relief/
concessions on supplies made on airport projects, as they assume a
significant cost. Similarly, service tax exemption on outsourced
services for such airport projects may also be looked into to boost
infrastructure.
On another aspect, lease rentals on aircrafts are subject to levy of
fringe benefit tax (FBT). This is a huge cost to airline operators
considering the high value transactions and puts a further squeeze on
the airline margins. In this context, exemption from levy of FBT will
definitely be a welcome move.
Under the current system, service tax is charged on international air
travel undertaken by passengers from India other than those traveling
in economy class. Also, tax is levied on air transport services
provided to a passenger embarking in India for international journey
by scheduled airlines. Several arguments have been propagated against
this, primarily on the grounds that such services are essentially
provided outside India and therefore should not be chargeable to
service tax. The issue gets further complicated with the fact that
export benefits are also not available in respect of such services,
since the same have been kept out of the ambit of Export Rules.
In addition, tax authorities are of the view that this tax is leviable
on the full value of ticket even in cases where there are stopovers in
and outside India or where tickets are booked for the return journey
or where bookings have been made from outside India for an
international journey commencing from India. A suitable clarification
on the above is long-awaited by the industry.
Gliding further, presently the Aviation Turbine Fuel (ATF) is
chargeable to Excise duty at the rate of 8 percent, and VAT is levied
by the States at varying rates generally in the range of 20-30
percent, thereby resulting in a very high effective tax rate in the
range of 30-40 percent for ATF. This coupled with uncertain crude
prices results in a major financial burden for the airlines. With
this backdrop, the industry has been long demanding 'declared goods'
status for ATF, which would help reduce the applicable VAT to 4
percent or lower.
The above steps would certainly be in line with the Government's
commitment over last few years with respect to encouraging the
investment in this sector. With the 2010 Commonwealth Games a little
over a year away, airline traffic is expected to grow substantially
and the Government should clearly aim for investment-oriented tax
incentives with intent to meet the increased infrastructural
requirement in the sector.
In essence, the Indian aviation industry is now moving ahead from
turbulent times to more stable skies and clarity by the government on
key tax issues plaguing the sector today would certainly go a long way
in providing the much needed momentum to the Indian Aviation.
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