Dear finance minister, your budget could seal Indian aviation’s fate

Will she or won’t she?
Will she or won’t she?
Image: REUTERS/Kham
We may earn a commission from links on this page.

For a while now, India’s aviation industry has been on a wing and a prayer.

Burdened by high fuel prices, rising cost of airport operations, and taxes, the sector will be high on hope as finance minister Nirmala Sitharaman presents her first union budget on July 5.

Policy initiatives have become imperative as the dire straits that airlines are in show. India’s oldest private carrier halted operations over two months ago and has now been referred by lenders to the debt tribunal for bankruptcy proceedings. State-run Air India, meanwhile, may not be able to pay salaries beyond October as it is burdened by debt repayments, reported the Economic Times newspaper, quoting senior officials.

This has had an impact on domestic passenger traffic, which, for the first time in five years, contracted by 4.5% year-on-year in April, data from sector regulator directorate general of civil aviation show.

“Given the strong contribution of the aviation sector to the economy, the union budget should address the challenges related to complex policies, a multi-tiered tax system and (poor) infrastructure,” Indiver Rastogi, president and group head of global business travel at Thomas Cook (India), told Quartz.

Here’s what experts want Sitharaman to focus on:

Regional connectivity

Budget carriers IndiGo and SpiceJet have started to reap the benefits of introducing flights to non-metro cities.

“There is a huge surge in demand from smaller cities for domestic travel. While RCS (regional connectivity scheme) has made notable progress, steps should be taken to encourage more airlines to fly to some of the tier 2 and tier 3 regional airports,” said Aloke Bajpai, CEO and co-founder of the Gurugram-based travel portal Ixigo.

In 2017, India launched the Ude Desh ka Aam Nagrik (UDAN), which aims to increase regional connectivity by capping airfares on these routes. Air India’s subsidiary Airline Allied Services, SpiceJet, IndiGo, Air Deccan, Air Odisha and Turbo Megha are the main flight operators under UDAN.

Experts say more airlines should be included and the scope of RCS initiatives should be expanded.

“Sustained delivery on key initiatives like UDAN, Heritage City Development and Augmentation Yojana (HRIDAY), and integrated development of pilgrimage destinations through Pilgrimage Rejuvenation and Spirituality Augmentation Drive (PRASAD) is the need of the hour,” said Mahesh Iyer, executive director and chief executive officer, Thomas Cook (India).

Lower taxes

Aviation Turbine Fuel (ATF) in India has not yet been brought under the goods and services tax (GST) regime. The central government currently charges an 11% excise duty on ATF and state-level taxes can go as high as 30%.

“There is a need for bringing air turbine fuel within the ambit of the goods and services tax, thereby effectively capping the tax rate at 28% and ensuring seamless flow of input tax credits,” Anuj Prasad, partner, Shardul Amarchand Mangaldas, a Delhi-based corporate law firm, told Quartz.

Airlines and travel portals say they are also burdened by tax collected at source (TCS) when they sell a services.

“As this sector is one of the most tax compliant in India, we hope the government will take necessary actions to remit or remove TCS entirely. This will alleviate the unnecessary financial burden on airlines and OTAs (Open Travel Alliance, a group of major airlines, hoteliers, and others in the travel industry),” said Indroneel Dutt, chief financial officer at Cleartrip, a Mumbai-based online travel firm.

Allied sectors

Analysts’ hopes for sectors tied to the aviation industry are also high. For instance, the Maintenance, Repair and Overhaul (MRO) industry, should get tax cuts, they say.

“The budget should try to address the tax issues faced by MRO industry by reducing the GST rate. Currently airlines prefer getting cheaper services from countries like Sri Lanka, Singapore, Malaysia and not from India. So a policy providing some relief in that aspect is expected,” said Vishal Kotecha, associate director at India Ratings & Research Private Limited, a New Delhi-based credit rating agency.

Focus on providing superior infrastructure is also in the budget wish list. “The government must incentivise infrastructure activities in the sector, such as development of new commercial airports in high customer density areas,” Prasad said.

Rajeev Kale, president and country head for holidays at Thomas Cook (India) advocated strengthening of overall infra ecosystem. “A focus on increasing allocation to development of new tourism circuits and attractions, along with improvement of roads, railways, airports, waterways and sanitation will catalyse growth.”