In the recent months, the aviation sector appears to be undergoing a recovery and the worst seems to be over.
The industry is looking forward to the upcoming Budget with the expectation that its long-standing demands be addressed so that they can complete the recovery and restart expansion. The key expectations are discussed below:
?Declared goods? status for ATF
High prices of ATF have been the bane of the Indian Aviation sector. One of the key contributors towards the high prices of ATF in India has been the high local taxes.
States impose varying rates of VAT on ATF and the rates are mostly on the higher side. It is pertinent to take note of the specific case of Andhra Pradesh, which had reduced the VAT rate on ATF to 4% in 2008. The Andhra Pradesh government has recently hiked the rate of VAT on ATF to 16%.
The significance of the adverse impact of high local taxes on ATF in India is evident from the fact that where the Association of European Airlines (AEA) members indicate that their fuel bill constitutes 13.3% of their total operating expenses, for Indian carriers the fuel bill constitutes 45-50% of the operating expenses.
?Declared goods? status for ATF would ensure that VAT would be leviable on ATF at a uniform rate of 4% across the states.
The Budget of 2007-08 addressed this longstanding industry demand only partially by providing ?Declared goods? status to ATF sold to turbo-prop aircraft in order to promote air linkages to remote areas benefiting a very small portion of the whole industry.
An overall ?Declared goods? status for ATF would go a long way in restoring the financial health of the Indian aviation sector and it is expected that the finance minister would oblige the industry in the upcoming Budget.
Removal of service tax on international travel in first class and business class
From the year 2006, service tax is being levied on international travel via air, in all classes other than the economy class. Since such services of international air travel can not be claimed as ?export of services? (owing to specific exclusions), this levy results in an unnecessary addition to the cost of travel. Removal of levy of service tax on this category or grant of export status, would certainly be desirable.
Further, it is important to take note of Resolution Doc. 8632 of the International Civil Aviation Organization (ICAO), an agency of the United Nations which codifies the principles and techniques of international air navigation and fosters the planning and development of international air transport to ensure safe and orderly growth.
Since the early 1950s, the ICAO has had policies and guidance for member States on the taxation of international air transport. The policy of ICAO on taxation as evidenced in the Resolution Doc. 8632 do not support taxes on the sale and use of international air transport. India is an important constituent of ICAO and accordingly it is expected that India should with-draw this service tax in accordance with the principles laid down vide the above resolution.
Ambiguity with respect to imports by MRO service providers
With the aviation boom in recent years, there has been a significant increase in the demand for specialised MRO (maintainance, repair and overhaul) service providers. Traditionally, MRO requirements were catered to by in-house departments of the airlines.
With the spurt in the number of new Airlines joining the fray and increasing competition, outsourcing the MRO activities to specialist third party service providers is increasingly emerging as a more efficient option.
Provided the right regulatory and fiscal facilitation, India has high chances of emerging as an MRO hub in the South and South?East Asian region. Customs and excise duty exemptions/concessions exist for various categories of MRO activities for airline companies operating scheduled air transport/air cargo services and registered as such under Rule 134(1) read with Schedule XI of the Aircraft Rules, 1937. However, the availability of such exemptions/ concessions, for third-party MRO activities providing the services to companies operating scheduled air transport/air cargo services and registered as such under Rule 134(1) read with Schedule XI of the Aircraft Rules, 1937 as well as those that are not registered, is not free from doubt.
It is desirable that a general exemption/concession for all imports/ local procurements required for third-party MRO activity in India be introduced, so that India can gain the status of a global hub for these activities.
While the Indian aviation industry tries to turn a corner and move ahead towards better times, it expects that the government would facilitate the process by meeting the above expectations.
?Sujit Ghosh (sujit.ghosh@bmradvisors.com) is a partner with BMR Advisors and leads the infrastructure practice of the firm. The views expressed are personal.