Budget 2019: Some tax sops likely for aviation sector to tap growth opportunities

The government is expected to reiterate its focus on improving regional connectivity through its Regional Connectivity Scheme or UDAN and making flying affordable to the masses by providing a favorable eco-system

The Indian aviation industry is largely untapped with huge growth opportunities. However, off late, the sector is facing turbulence in terms of operational inefficiencies and increased input costs, thus pressuring the profit margins of the airlines.

In order to help airlines reduce their high cost and debt burden, the government needs to provide certain tax sops, especially lowering taxes on aviation turbine fuel (ATF), which comprises ~30-40 percent of the total cost of an airline, and the prices of which are ~45-50 percent higher in India, as compared to international prices.

Furthermore, under the goods and services tax (GST), airlines can claim the input tax credit on all inputs (refers to all goods purchases and includes among others purchase of spare parts, food items, etc, but excludes ATF since it is not under the purview of GST) on the business class.

For the economy class, they can claim input tax credit only on input services. This is as against the erstwhile service tax regime, where airlines could claim CENVAT credit on all inputs (excluding ATF) for both economy and business classes.

In addition, import of aircraft and spare parts now attract 5 percent GST, as against nil customs duty earlier. Thus, airlines have been wanting this anomaly to be rectified.

The government is expected to reiterate its focus on improving regional connectivity through its Regional Connectivity Scheme (RCS) or UDAN (Ude Desh ka Aam Nagrik) and making flying affordable to the masses by providing a favorable eco-system.

With a continued thrust of the government on infrastructure creation and development, the Budget is likely to focus on upgradation of airports in Tier 2 cities through public-private-partnership (PPP) route.

Furthermore, a reiteration of focus on setting up new airports and expansion of existing airport capacities at some key airports to help address the current airport infrastructure constraints being faced by the airlines, improve connectivity with the underserved/unserved airports and thus boost tourism, would help.

There could also be some focus on the maintenance repair overhaul (MRO) sector. In line with the government’s increasing thrust on ‘Make In India’, the Budget could focus on incentivizing the MRO sector so as to retain the MRO activities in the country.

The Budget is also expected to prioritize the privatization of Air India. The government is also expected to continue to focus on its core theme for tourism development in India and undertake measures to boost tourism.

Focussed efforts to preserve India’s heritage cities, improve visitor experience, and upgrade sanitation and supporting infrastructure, would help drive tourism.

Also, the government is likely to develop more iconic tourist destinations to further improve tourism, and thus support the growth of the Indian aviation industry.

Overall, in a longer time frame, the Government needs to address India’s aviation infrastructure requirements and other matters, which have constrained the performance of airlines to strengthen the foundation for growth in the coming years.

The author is Vice President and Co-Head, Corporate Sector Ratings, ICRA Ltd.

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