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Fiscal Issues



Airlines are an important part of the Indian economy. Apart from contributing considerably to the national exchequer and providing significant employment opportunities, a whole host of industry sectors – from tourism to hospitality – also benefit from the well being and growth of the Airline industry.

The high operating-cost environment in India, coupled with the competitive nature of the Airline business, has resulted in a continued strain on the health of the airlines in India.

There are various issues that need to be addressed:

Fiscal Issues:
  • Rationalizing ATF Prices to International Benchmarks
  • Withholding tax on leased aircraft
  • Fringe Benefit Tax
  • Service Tax
  • Sales Tax
  • Cenvat Credit on ATF
  • Hedging of Aviation Turbine Fuel (ATF)

Rationalizing ATF Prices to International Benchmarks



Fuel currently accounts for close to 40% of the total operating costs for airlines in India. The estimated annual fuel bill for the industry is around USD 1.7 billion, based on September 2006 rates. There is also a tremendous wastage of fuel in the air & at the tarmac, due to traffic congestion in Delhi and Mumbai that the airlines have to bear.

Current ATF prices in India (Dec 2006)
Domestic Flights International Flights (ex India) International Price
Rs. 37,800 / kilolitre Rs. 28,450 / kilolitre Rs. 21,400 / kilolitre

The ATF price in India is Rs 37,800 per kilolitre as against the international price of Rs 21,400 per kilolitre, which is about 77% higher (at December’06 prices). ATF prices for domestic operations in India are unduly higher than international benchmarks – resulting in a tremendous financial burden on Indian carriers.

Following the dismantling of the ‘Administered Price Mechanism’ (APM) effective April 1, 2001, the prices of ATF in India are based on the “International Import Parity Prices”, and directly linked to the benchmark of Platt’s publication of FOB Arabian Gulf ATF prices (AG); and do not relate to the actual cost of producing ATF in India. ATF prices for domestic operations also include Freight charges from Gulf to India, Customs Duty of 10%, domestic transportation and other charges, Excise Duty of 8.16% (including cess), Sales Tax (levied by the State Governments) averaging across the country at 23% as add-ons to the AG prices, besides the Oil Companies’ markup.

Even though the ATF supplied at Indian airports (both for domestic and international operations) is not imported into India but is the product of crude refined in Indian refineries from imported crude, the 10% Customs Duty is taken into account in fixing the prices of ATF supplied to the airline operators.

Comparative ATF Rates (March 2006)
Bangkok Singapore Kuala Lumpur Sharjah India
Rs 22,383 / kl Rs 22,111 / kl Rs 21,427 / kl Rs 23,017 / kl Rs 37,000
65% 67% 72% 60% differential %age

Aviation Turbine Fuel (ATF) prices for domestic operations in India are thus approximately 60-70% higher (at March’06 prices) than international benchmarks.
  • Rationalization of ATF prices for domestic operations, to international benchmarks will result in an estimated annual savings of USD 624 million for the airline industry.
  • Considering that the crude prices have increased by around 40% between January 2005 and September 2006 as well as the increase in the number of flights operated by domestic carriers in India by over 50%, the revenue collections by the center and the various states has increased significantly over this period.
  • ATF sold to turbo-prop aircraft has already been categorized as Declared Goods under the Central Sales Tax Act.
There is a need to review the tax structure for ATF uplifted for domestic operations.

Withholding tax on leased aircraft



Section 10(15A) of IT Act of 1961 provides exemption from payment of withholding tax on lease rental incomes on aircraft and engines earned by a non-resident Lessor from an Indian company, subject to respective agreements being approved by the Indian Government. This exemption is currently valid only for lease agreements which have been signed prior to 31 March, 2007. The non-availability of this exemption subsequent to March 2007 will significantly increase fleet acquisition costs of Indian carriers, particularly in a market where demand for aircraft is greater than supply.

The aircraft leasing finance companies have a gross up clause in their agreements whereby the WHT is paid not by the lessor (lease company), but by the lessee (Indian Airline). The vast majority of countries too, impose no withholding tax on lease rentals.  The few countries that do impose a WHT, have allowed planning and structural alternatives to minimize the taxes, such as leasing the aircraft through our existing foreign subsidiaries. Previously, Australia and Japan had withholding tax laws, but those have been repealed.

The leasing route is an established industry practice for airlines globally. Major international leasing companies indicate that the vast majority of countries do not impose withholding taxes on lease rentals payable. In all cases, the lessors require the leasing companies to assume the liabilities for any withholding taxes imposed as also of all indirect taxes applicable such as value added and property taxes. All aircraft and engine lease agreements thus inevitably contain clauses that require the lessee to gross-up the payments for all taxes levied.

The non-availability of this exemption will significantly increase the fleet acquisition costs of Indian carriers, particularly in a market where demand for aircrafts is greater than the supply.

Fringe Benefit Tax



The Finance Act 2005 had introduced a tax on fringe benefits.

This tax has also been made applicable on
  • free / concessional passages granted to airline executives and family
  • expenses for crew
  • hotel accommodation provided to passengers due to delays & cancellations; and
  • expenses on catering and inflight entertainment.
None of these items can be considered as ‘fringe benefits’. There is thus a need to remove these from the coverage of FBT.

Service Tax



The applicability of Service tax on F & J class tickets on international travel; and on landing and air navigation fees needs to be reviewed.

F& J Class tickets: This tax is not global practice, and therefore puts Indian carriers’ potential as International network carriers in jeopardy as it increases the total amount a passenger connecting through India must pay as compared to connections via any other point.

Service tax on landing, airport & air navigation fees: India has imposed a 10.2% service tax fee on landing, airport and air navigation fees. This greatly reduces the competitiveness of India's air transport sector.

Sales Tax



There are distortions in the sales tax levied in the aviation sector.

There is a disparity in the fuel sales tax between Turbo Props and Regional Jets (less than 100 seaters). While Turbo Props enjoy substantially lower sales tax concessions, Regional Jets which are also deployed on the same routes are charged higher sales tax for their fuel needs. This is not helpful for the promotion and good health of India’s Regional Carriers.

Sales Tax / VAT are payable on all supplies meant for international voyages irrespective of the jurisdiction of its consumption. There is a need for extending the same benefit to the airlines – as in the case of exporters where they are exempt from payment of any Excise Duty / Sales Tax on their inputs – on all its procurements dedicated for its international operations.

Cenvat Credit on ATF



It has been opined by the Service Tax Department that under the provisions of the CENVAT Credit Rules, 2004 (“CCR, 2004”) as is in force today.

This view is contrary to The CENVAT Credit Rules, 2004, provide for credit of Excise duty in respect of all “Inputs” other than specifically excluded inputs. Credit of Excise duty paid on ATF is not however not available currently.

Non-allowance of credit to the airlines on ATF is against the fundamental principle of the CENVAT provisions – resulting in the cascading effect of taxes.

Hedging of Aviation Turbine Fuel (ATF)



De-regulation of Commodity Hedging is proceeding on a slow path. Domestic airlines have to procure ATF only through domestic refineries at International Prices. Since they are not physically importing the commodity, the airlines are not permitted to hedge the commodity risk.

In a upward moving oil regime, the airlines have no option but to see their input costs explode and whenever possible, pass on the same to passengers. A similar situation was faced by local refiners on hedging their refinery margins where the Government and RBI came out with a notification permitting national oil companies to hedge their refinery margins without having physical import/exports. At a time when there are concerns of crude continuing to be floored at USD 50-55 with no apparent ceiling in sight, it becomes even more relevant to seek relief through the hedging market.

An urgent re-look at the present oil/petro products hedging regulations is needed. Domestic airlines should be permitted to hedge their ATF price risk. Many global airlines have used fuel hedging for effective risk management for themselves.

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