The government is all set to scrap the present system of granting case-by-case exemption to airlines from paying withholding tax on aircraft leases. Finance minister P Chidambaram is expected to scrap the tax on aircraft leases altogether in the forthcoming Budget.
Withholding tax was a major expense for the carriers as it varies between 10% and 48% a year depending on the country where the airplane is leased.
Indian carriers are expected to acquire about 450 aircraft in the next five years and a large number of these will come as leased airplanes. Domestic aviation sector expect that if withholding tax continues, Indian carriers are expected pay over Rs 1,000 crore a year as tax. This is a significant part of the cost and profits of the aviation industry, which is likely to incur losses of Rs 2,000 crore this fiscal.
Assuming that the tax is paid by an airline company, the average monthly lease rent of an Airbus A320-type aircraft is about 1% of the price value, which turns out to be about Rs 20 crore a year.
In order to provide a boost to the country?s booming aviation sector, which is growing at over 40% a year, the government has been exemption of paying the tax on a case-to-case basis.
The airline had to make a presentation to the government and was granted the exemption. According to industry analysts, almost all airlines in the country that have acquired new aircraft have done so by lease and not outright buy from the aircraft manufacturers. But, they point out that a complete removal of the tax would come as a major comfort factor for the carriers as it removes the procedural issues.
At present, all airlines in the country are waiting for new aircraft to arrive until 2014 but are unable to order more aircraft as all the order books of major plane makers Boeing and Airbus are full till 2014. Any orders made now will only come after 2014.