BackService tax on aircraft lease to hit airlines
Service tax of 12.36% on leased aircraft means an annual outgo of `185 crore for Indian airlines
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New Delhi: The proposal in the Union budget to levy service tax on plane rentals is expected to further burden loss-making carriers flying above the debris of failed aviation ventures of the recent past.
Leased aircraft, numbering about 350, make up most of the airline fleets in India. The country’s six biggest airlines—Air India Ltd, Jet Airways (India) Ltd, SpiceJet Ltd, IndiGo, Air Costa and GoAir—together pay about ₹ 1,500 crore annually in aircraft lease rentals. Service tax of 12.36% on this amount means an annual outgo of ₹ 185 crore. The tax will be applicable from 1 October.
Heavy losses grounded billionaire Vijay Mallya’s Kingfisher Airlines Ltd in 2012. It was preceded by the fall of Paramount Airways, Air Deccan (merged into Kingfisher), MDLR Airlines, Indus Airways and Deccan 360. Airline consultancy Capa Centre for Aviation does not rule out another airline going bust this fiscal year.
Finance minister Arun Jaitley’s maiden budget promised little relief for the struggling sector.
“Place of provision in case of services of hiring of vessels or aircraft irrespective of whether short term or long term shall be the place of the service recipient," the Finance Bill said, including aircraft rentals under the heading service taxes.
“Someone has to tell the government this will hit the industry badly," said a senior executive from an airline who declined to be named. “It is unprecedented."
The Finance Bill, however, clarified that “aircraft engines and parts thereof are eligible for duty exemption when imported for servicing, repair or maintenance of aircrafts used for scheduled operations".
Mint had reported on 23 April that some airlines were found avoiding customs duty on engine replacements. The latest clarification will serve as a relief for them. It is not clear if the change will have retrospective effect.
Airlines’ expectations of lower jet fuel taxes, though, did not come true.
Capa estimates only IndiGo made a profit among Indian carriers in fiscal 2013-14, when the rupee fell and fuel costs rose. Even then, its profits are estimated to have nearly halved to ₹ 400 crore from ₹ 787 crore recorded the previous fiscal year. Combined losses for the airline industry were at $1.77 billion ( ₹ 10,630 crore today) in fiscal 2013-14 and are expected to be $1.4 billion this fiscal year. Capa’s 2014-15 outlook does not rule out the closure of one more airline in India given the current cost burdens.
Lack of any incentives in the budget for the airline industry could deter foreign investors, an analyst said.
“International investors want a signal that investing in Indian carriers can yield a positive return—unfortunately, the high tax burden and onerous regulations make this a bigger challenge in India than elsewhere. The budget hasn’t changed the investment environment in the aviation industry," said US-based Vikram Krishnan, a partner at Oliver Wyman and an adviser to West Asian airlines. Krishnan said the pool of airline investments globally is already limited.
“Etihad seems to be the only activist investor, even in Europe. Latin American airlines were attracting some investment interest from the US," Krishnan said.
Airlines have few options unless finance minister Jaitley reviews the proposal, said Steve Forte, a former Jet Airways chief executive officer based in New York. “The message is that the government has higher priorities than the aviation industry."
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