The Hindu Business Line : Some air-pockets in the Budget

WHILE SOME of the Budget proposals may have a positive impact on the bottom-lines of a few airlines, there is not much to cheer about for the industry at large.

The Union Budget 2007-08 has proved a mixed bag for the domestic aviation sector. While Mr M. Thiagarajan, Managing Director, of Paramount Airways and, to some extent, Mr Vishwapati Trivedi, the Chairman and Managing Director of Indian, and Mr Alok Sharma, Air Sahara's President, could look at the implementation of the Budget proposals as having a positive impact on their bottom-lines, there is not much to cheer about for the industry at large.

In fact, the passage of the Budget proposals in their current form could have an adverse impact on the bottom-lines of most airlines. For instance, the decision not to extend the exemption on withholding tax given to airlines for lease rental payments and aircraft engine leasing beyond March 31 this year is likely to see aircraft lease rental becoming more expensive.

The industry's hope that the Finance Minister would have a re-look at the tax imposed on first and business-class international tickets, and rationalise taxes on aviation turbine fuel including reducing the Customs duty on ATF for domestic operations, Fringe Benefit Tax on free or concessional passages granted to airlines personnel and families, expenses for crew, among others, remain a distant dream. "Going by the Budget announcements, it would seem that the aviation industry is on the periphery of the Government," the Managing Director of Air Deccan, Capt G. R. Gopinath, said.

Continue with exemption

But the industry has still not given up hope and plans to try and convince the Finance Minister on the need to continue with the withholding tax (WHT) exemption on lease payment for aircraft and engines. While the WHT tax exemption has been extended thrice by the Government already, industry representatives argue that the exemption is required now more than ever before as the domestic sector is on the upswing and withdrawal of the exemption would put additional financial burden on the airlines.

The passage of the Budget proposals in their current form would also make it more expensive for individuals to import aircraft and helicopters as it is proposed to not only levy an import duty of 3 per cent, but also a countervailing duty (CVD) of 16 per cent and a special additional duty of 4 per cent for importing these machines. Similarly, a Customs duty of 3 per cent, a 16 per cent CVD and a 4 per cent additional duty of Customs has been imposed on parts imported for such aircraft.

Many in industry feel that to avoid paying more for importing private aircraft, companies may register such aircraft abroad. "Several corporate houses have businesses not only in India but also abroad. They may look at registering the aircraft there so as to save any additional financial burden. This is not uncommon and is being done at present as well," a spokesman for an aircraft manufacturer said.

Positives too

But amidst these negative reactions, there are also some positives. For starters, the Budget has paved the way for a smooth merger of Air India and Indian, which has been approved by the Cabinet.

The Budget has proposed amending Section 72-A of the Income-Tax Act so that the accumulated losses and unabsorbed depreciation of the amalgamating company or companies will be set off against the profit of the amalgamated company.

At present the benefit is available in case of amalgamation of a company owing an industrial undertaking, a ship or a hotel with another company. The Budget adds that the amendment will take effect from April 1 next year and would apply in relation to assessment year 2008-09 and subsequent years.

At the same time, the Finance Minister's decision to allow small jets to procure aviation turbine fuel (ATF) at a uniform 4 per cent sales tax rate throughout the country would provide an annual relief of about Rs 100 crore to both Air Sahara and Paramount Airways. "We see a saving of about Rs 60-70 crore annually," Mr Thiagrajan said.

The decision could also lead to Paramount extending its network and looking at the viability of operating flights on routes such as Coimbatore-Goa and Cochin-Ahmedabad, Mr Thiagrajan added.

Similarly, Mr Sharma said that the annual saving for the seven CRJ aircraft operated by Air Sahara that would now get ATF at reduced rates, would be Rs 25-30 crore.