Budget puts airlines on a high

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Some of the Budget proposals may bring long-term benefits to aviation players, both in public and private sectors.
Some of the Budget proposals may bring long-term benefits to aviation players, both in public and private sectors.

Ashwini Phadnis

THE Budget 2005-06 has provided some much-needed relief for the airline industry. While some of the industry demands are still pending, there is a ray of hope, with some of the Budget proposals likely to hold out long-term benefits for the sector.

For instance, the decision to put on hold till end-September this year the implementation of the withholding tax on leasing of aircraft and aircraft engines should give the industry some immediate and short-term relief.

Delivering the Budget speech in Parliament, the Finance Minister, Mr P. Chidambaram, said that in deference to the request of Air India (AI) and Indian Airlines (IA), he proposes extending up to September 30 this year, the exemption from tax on agreements to acquire aircraft or aircraft engines on lease.

While the Finance Minister may have only mentioned the two state-owned airlines, the decision will surely be heartening news for all the aviation players, whether in the public or the private sector.

Private sector airlines are also making use of both leased and purchased aircraft for their operations. While all 20 aircraft in the Air Sahara fleet are leased, 18 of the 42 aircraft in Jet Airways are leased.

Commenting on the decision, the Managing Director of Air Deccan, Capt G. R. Gopinath, said that the move to push back withholding tax would come as a relief to first-generation entrepreneurs.

The move was also welcomed by the Chief Operating Officer of the soon-to-be launched Kingfisher airline, Mr Alex Wilcox, who felt the move would give the airline an opportunity to take a few more months to complete the leasing process.

It will also come as a shot in the arm for the two state-owned airlines that are leasing aircraft till their fleet acquisition plans are cleared.

IA recently floated tenders for leasing not only 12 wide-body aircraft, including the Boeing 767 Extended Range, 777, Airbus A-310-300 and the A-340 aircraft but also six ATR-42-320 aircraft. Incidentally, this is not the first time that the Government has pushed back on implementing the withholding tax.

The Finance Minister first mooted the idea of imposing a withholding tax on aircraft and aircraft engines being leased in July last year.

The implementation of the decision was pushed back initially till April this year and, after the recent Budget, till end September. Withdrawal of the exemption would have meant a tax rate of more than 40 per cent.

The Budget also provides some relief for airlines that are on the verge of expanding their operations into the global skies. The Budget proposes declaring the sale of Aviation Turbine Fuel (ATF) to any designated Indian carrier for its international flight as deemed export.

This would enable the designated Indian carriers to purchase ATF for their international flights without payment of sales tax. Officials, while welcoming the decision, said that the airlines of India, would however, be paying a price that is still higher than what foreign airlines operating from India pay for uptake of ATF.

However, despite this, the move should help the sector, especially as the Government had last December allowed private sector airlines Air Sahara and Jet Airways to expand their international operations.

The government has now allowed both the private sector airlines to start operating to London, Singapore and Kuala Lumpur. The earlier National Democratic Alliance (NDA) Government, headed by Mr Atal Bihari Vajpayee, had allowed the airlines to start operating to Kathmandu and Colombo. Incidentally, Jet Airways has announced that it will operate three times a week on the India-Brussels-New York sector.

The Budget also proposes the establishment of a financial Special Purpose Vehicle (SPV) to finance infrastructure projects, including airports. Senior officials of the Ministry of Civil Aviation indicated that monies from the SPV could be used for the development of airports in non-metro cities.

Incidentally, the Government has identified 25 non-metro airports for being upgraded. The Minister for Civil Aviation, Mr Praful Patel, said that the SPV would support attempts to raise monies for development of non-metro airports.

Besides, there is also a budgetary provision of Rs 325 crore for Indian Airlines that should facilitate the airlines 43-Airbus aircraft fleet acquisition proposal.

Probably the only dampener for the sector and air passengers is that no steps were announced to reduce the prices of aviation turbine fuel.

(This article was published in the Business Line print edition dated March 7, 2005)
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