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Statement by V Thulasidas, Chairman, Federation of Indian Airlines
at the FIA interaction with Secretary-Revenue, Mr K M Chandrasekhar

April 26, 2007; New Delhi

The Federation of Indian Airlines (FIA) called on Mr K M Chandrasekhar, Secretary-Revenue and his team from the Ministry of Finance, on April 26, 2007.

Issues relating to Fiscal matters arising from the Union Budget 2007-08; and also the state of the airline industry in India, were brought up for discussion.

V Thulasidas, Chairman, FIA; and Chairman & Managing Director, Air India Ltd, led the FIA team at this meeting with Secretary-Revenue. Others who joined from the Airlines' side included Vishwapati Trivedi, CMD, Indian Airlines; Saroj Datta, ED, Jet Airways; Siddhanth Sharma, CEO, Spicejet; Hitesh Patel, Executive VP, Kingfisher; Bruce Ashby, President & CEO, IndiGo; Sanjay Bahadur, Kingfisher; D S Kohli, ED North, Air India; & Amitabh Khosla, ED, FIA.

Remarks made by Chairman, FIA are extracted below.

Thank you Mr. Chandrasekhar, for giving time to the FIA - the Federation of Indian Airlines, to call on you today.

As you are aware, FIA is a newly formed business association of all the scheduled airlines in India. At FIA, the agenda of the Airlines which otherwise compete fiercely in the market-place, is a collaborative & a growth-oriented agenda; and the focus is on identifying inter-airline synergies which can have a beneficial impact across the airline industry.

To start with, I would just like to first make a few broad points as a backdrop to our discussion today;
  1. I am sure you will agree that Airlines are an important part of the national economy. Airlines have contributed to the exponential growth in transport-connectivity and also the growth of freight-logistics in the country. Passenger traffic has grown by around 45% in the past 1 year; and competition has driven the carriers to vie with each other to scale-up and connect more & more new-city pairs.
  2. Indian carriers operate in a frighteningly high-cost environment.
    * Fuel (ATF), which accounts for 40% of the operating cost of airlines, is priced about 65% higher in India, compared to international bench marks. In Dec 2006, Indian carriers bought ATF at Rs 37,800 per kilolitre, while international carriers paid only Rs 21,400 per kilolitre - thus a difference of 77% at last December prices.
    * Similarly, Airport charges which include navigation / landing charges, are about 80% higher in India, compared to international benchmarks.
  3. The airline industry in India is a fiercely competitive industry; where the players often price their fare abysmally low to gain market-share. The result has been low revenue & excess supply in the airline industry.
    In the past one month, Indus Airways, a fledgling new scheduled carrier has gone-under, seemingly unable to pay even its aircraft lease rentals.
  4. Thus, while the airline industry has provided economic growth, employment, consumer-choice among others, the airlines themselves have been under tremendous financial strain over the past few years. Most of the Indian carriers have reported operational losses in previous few quarters.
  5. Given the high visibility that surrounds aircrafts & airlines, there is often a perception that airlines have large coffers; and that airlines would be able to afford larger & higher shares of the tax-burden.
    A quick study of the financial results of the publicly listed Indian carriers & audited accounts of the privately held carriers would reveal the constraints that airline balance sheets are currently subjected to.
  6. I would like to point out that the Airlines are willing to take up their share of responsibility; and a fair share of the tax-burden. We do not seek any protection whatsoever; and certainly no one is calling for any US-style US$ 15 billion federal bail out packages.
  7. The current consolidation phase bodes well for the health of the Indian Airline industry. We firmly believe that our carriers are well placed to come out stronger.
  8. There is also a larger opportunity in aviation for India. India was all along absent from the avionics sphere of the activity in aviation. A growing national-fleet of aircraft is also bringing in investments from avionics & global majors in maintenance & repairs. Lufthansa Technik's recent announcement of an MRO hub at Hyderabad; Boeing's investment in Nagpur among others, are derived from the action that Indian domestic aviation is witnessing.
    Also, an increase in the aviation market-size, of-course continues to bring increased revenue - both direct as well as derived - to the exchequer.
  9. Clearly, strong domestic airlines with sound financial health are in the interest of the national economy and we hope that the government and especially your ministry would be supportive of the airlines in this regard.
  10. Any mitigation or moderation of taxes as applied to the Airline industry, will contribute to improving the financial health of the Indian Airline industry.

I would now like to briefly bring-up the FIA fiscal recommendations to your attention. The points are perhaps already well known to you. We would urge you to kindly consider these issues favourably and grant relief to the Airline industry;

Withholding Tax on Leased Aircraft

The impending withdrawal of the exemption on WHT on leased aircraft under Section 10 (15A), brings forth a few key issues for the Indian carriers;
  • Firstly, given the scale at which international aircraft finance operates, there is no depth in the local financing market to replace the global aviation financing sources currently used by the airlines;
  • Secondly, the removal would have a greater proportional impact on carriers investing in new aircraft than on the established carriers for whom fleet renewal is only a small percentage of the total fleet ownership cost – resulting in a new competitive distortion in the industry; and
  • Thirdly, global lessors will not absorb any part of the tax, forcing the burden into passenger fares and / or creating additional financial distress in the growing Indian aviation industry.
We would request the Ministry that the withdrawal of exemption on Withholding Tax on Leased Aircraft be kept in abeyance for a few months (4-6 months). This would give an opportunity to the Airlines to prepare a full report on the impact of the tax on the airline balance sheets, to bring up for your consideration.

Sales tax on ATF

As mentioned earlier, fuel accounts for close to 40% of the total operating costs for airlines in India; and the price of ATF for domestic operations are over 65% higher than international benchmarks.

The Airlines had recommended that ATF altogether be given a "declared goods" status, thereby attracting a uniform 4% sales tax across India. Coupled with this, it had also been recommended that the current anomaly between the rate of sales tax on fuel charged on turbo-prop aircraft and the regional jets, also needed to be rectified.

Budget 07-08 addresses the above recommendation relating to sales tax on fuel, only partially by removing the anomaly between turbo-prop and regional jet aircrafts.

We would request the Ministry to kindly grant a "declared goods" status to ATF altogether.

On its part, the Airlines under the aegis of FIA are seeking time with the Empowered Committee of State Finance Ministers, to present a case for Rationalization of the sales tax on ATF.

Fringe Benefit Tax on Crew expenses

The tax on fringe benefits has been made applicable on expenses for crew; hotel accommodation provided to passengers due to delays & cancellations; expenses on catering and inflight entertainment; and the free / concessional passages granted to airline executives and family.

It is self-evident believe that none of these items could be considered as 'fringe benefits' since they are all an integral part of expenses incurred by carriers, in the ordinary course of business.

FIA would request the Ministry to kindly correct this anomaly before the enactment of the finance bill; and remove these items from the coverage of FBT.

Service Tax

FIA would request review of the applicability of Service tax on F&J class tickets on international travel; and on landing and air navigation fees. The tax on F&J class tickets 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.