The Hindu Business Line : Withholding tax exemption — Withdrawal may push airlines into turbulence

THE Government has decided to do away with the exemption on the payment of Withholding Tax (WHT) on leasing of aircraft and aircraft engines. What impact will this have on the aviation industry?

Industry sources point out that as the leasing of aircraft could become more expensive, the withdrawal of the exemption could also have an adverse impact on airlines' fleet expansion and modernisation plans. Many airlines in the country, including the two state-owned ones — Air India and India Airlines — are looking to lease aircraft till they can acquire new ones.

The exemption on payment of withholding tax on leased aircraft and engines ended on September 30. The decision to impose such a tax on import of aircraft and aircraft engines was mooted by Mr Chidambaram in the Union Budget of 2004-05. However, after representation from industry, the Government pushed back the imposition of WHT till September 30.

While there is no official word on whether the exemption has been extended or not, the industry is assuming that the tax will now have to be paid. The quantum of the financial impact of WHT on an airline will depend on a host of issues, including the residential status of the lessor and whether India has a provision of Double Taxation Avoidance Agreement with the country from where the aircraft is leased. The rate of taxation could vary from zero to 40 per cent.

"It will be in the best interest of the industry that the exemption on WHT continues. We have requested the Government to reconsider its decision. In the short run the lapse of exemption of the tax will not affect us as we had completed most of our leasing before September 30," the Director of the Low Cost Airline, SpiceJet, Mr Ajay Singh, said.

"The sector is growing and an extension of the deadline will help. We hope and pray that the Finance Minister extends it," said the Managing Director, Air Deccan, Captain G. R. Gopinath.

A senior Jet Airways official said that the withdrawal of exemption on WHT would have a financial impact on not only his airline but almost all the major players.

"The withdrawal of the exemption has come as a bit of a surprise. This is not a wise move and will have an impact not only on the sector but also the economy as a whole as aviation has a huge spin-off effect on the economy in general," an airline official said.

The issue saw the Ministry of Civil Aviation, the airline industry, and industry bodies such as the Confederation of Indian Industry (CII) make representations to the Government to get an extension.

Both private and state-owned airlines are looking to lease aircraft to keep pace with the growth in the domestic aviation market. Indian Airlines and Air India plan to lease aircraft, including Airbus A-320 and Boeing 777 aircraft to meet the market demand till the aircraft they are to purchase arrive.

Various airlines are also looking at the leasing route as the global aircraft market is firming up and getting aircraft is not easy these days. Besides, the imposition of WHT could have an adverse impact on the economics of the airlines, especially as the cost of operations is already very high, with rising fuel and airport costs.

The withdrawal of the exemption on WHT could put airlines at a disadvantage against one another, especially as those who have inked their agreements before September 30 will be at an advantage over others.

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