Wednesday, April 16, 2008

Domestic carriers pay 8 times costlier for ATF

by Jo Black

Domestic aircraft operators pay over 8 times higher taxes on Aviation Turbine Fuel (ATF) as these are charged with various tax levies, totaling 66% against 8% on international airlines that fill - in ATF in India and thus erode their annual profitability by 11% to 16%, according to The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

These findings are revealed in a Paper brought out by ASSOCHAM on implications of Higher Tax Incidences on ATF for Domestic Flyers’ highlighting that fuel is the largest component of operating expenses for airlines, accounting for almost 35-40% of their total cost.

“ As result of high tax incidences on ATF for domestic carrier like sales tax, central excise, import duty and educational cess which works out to be 66% as against 8% for overseas airlines, their adverse effect on profitability of full service carrier is estimated at 11% as per ASSOCHAM paper. However, on low cost carriers, the ATF taxes burden on their profitability is assessed around 16% “.

The ASSOCHAM President Mr. Venugopal N. Dhoot While commenting on the Paper said that if the government reduces sales tax on ATF by about 10% and customs by 4-5% respectively, the domestic aircraft industry can save about Rs. 6000 crore of annual revenue on it and suitably utilize the amount for building airport infrastructure.

The Paper further points out that aviation industry is impacted significantly by multi layered indirect tax system which includes value added tax, service tax, excise duties and custom duties. The impact of indirect taxes is not uniform and there is substantial variation between the tax treatments under various legislation for different types of aircraft carrier which need to be corrected, suggested Mr. Dhoot.

According to ASSOCHAM, the scheduled operation in aviation industry has largely been protected from the impact of custom duty on import of aircrafts or parts of aircrafts into India. Further scheduled aircraft are also exempt from payment of excise duty on aircrafts manufactured in India, whereas the aircrafts are used to operate a scheduled route.

The Chamber Paper further states that increasing disposable income coupled with greater consumerism have added in placing air travel as an alternative choice for upper middle and middle class which presently account for over 1/4th of Indian households and continuing high tax incidence will adversely effect the movement of middle class via aircrafts.

It has further estimated that the emerging middle class along with upper and upper middle population will grow to nearly 40% of the total population by 2007-08, whose size is likely to go over 55% in next 3 years and thus further enhance a huge demand for air travel services.

The increase in trade activities within the nation is also leading to the development of various mini metros which results demand for more routes that were hitherto unviable for airlines to operate, says ASSOCHAM.

While until lately, the target category of households has been only the upper middle to high-income categories, the drop in fares and conversion of premium rail travelers to air travelers could result in widening the addressable market to cover event the middle income households. According to estimates, the addressable population for the airlines industry is likely to grow by 10% to YoY in the next 3 years along with increasing emplanements.

The Indian aviation sector has shown an impressive growth after the arrival of several low cost carriers since 2003, and the growth was witnessed in both passenger and cargo traffic. The passenger traffic maintained a CAGR OF 19% from fiscal 2002 to fiscal 2006 (from 12.8 million to 25.5 million) in the domestic sector and a CAGR OF 13.7% from fiscal 2002 to fiscal 2006 (from 12.7 million to 21.2 million) in the international sector.

The aircraft traffic in the top tier cities in India has grown by 33% in 2005-06 and 14% in 2004-05. Most of the airports have recorded a growth of over 30% YoY in fiscal 2005-06. The modernization and expansion of the major airports of Delhi, Bombay, Chennai, Kolkata, Hyderabad and Bangalore are expected to facilitate further growth in traffic.

 

 

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