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Union Budget 2011-12: Impact on Travel and Aviation Sector

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Direct Tax Proposals

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An overview
The aviation industry in India is one of the sectors that has witnessed a constant pace of growth over the past several i d f h h l years. The open sky policy of the government has facilitated the entry of overseas players in the aviation sector in India following which there has been steady growth both in terms of g yg number of players and aircraft. This is reflected in a CAGR (Compounded Annual Growth Rate) of 16%. According to the Investment Commission of India, potential investment requirements in new aircrafts till the year 2020 could touch US$80 billion At present, private airlines account billion. present for over two-thirds of the domestic aviation market. The factors contributing to an increasing number of air travel passengers are as follows: 1. 1 The presence of multiple low cost airlines has resulted in competitive pricing of airfares; 2. The growing middle class and its purchasing power; and 3. Establishment of new airports and renovation/ restructuring of existing airports. The growth of the aviation sector and capacity expansion by b carriers h given rise to the f ll i challenges: i has i i h following h ll 1. Shortage of trained pilots and other technical personnel; 2. Inadequacy of infrastructure, despite the recent investments thi regard; nd in tm nt in this r rd and 3. Declining returns due to stiff competition and rising fuel costs. In order for the sector to continue the growth that it has thus f witnessed, it will be critical to address the above h far i d i ill b i i l dd h b challenges.

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Investment linked tax incentive by way of a hundred percent deduction in the year of incurrence of capital e pe d tu e suc expenditure such as ground handling equipment, safety g ou d a d g equ p e t, sa ety equipment and upgrade of software. This will enhance the airlines ability to invest in adding / upgrading assets which is a key requirement. Infrastructure status for the Aviation sector in order to qualify f d d ti lif for deductions on profits and gains under S ti fit d i d Section 80-IA. Expenditure on training including any payments to aircraft manufacturers, training academy, in-house cost on training pilots, etc should be given a weighted deduction while computing taxable income. Rationalise taxes on Aviation Turbine Fuel (ATF), which constitutes over 40% of the operating cost by bringing the commodity under the declared goods category. Concessions in airport fees and other charges. Removal of service tax on the following: first and business class tickets; domestic travel., and navigation fees on landing, airport and air.

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Direct tax proposals

1. There are no Di t T 1 Th Direct Tax p p l proposals specifically affecting the Travel and Aviation sectors. However, the following key changes applicable to all companies in general will affect this sector as well well. Increase in MAT rate from 18% to 18.5%. Since most airline companies are reeling under huge accumulated losses, there should not be any immediate additional cash outflow on account of this change. Reduction in surcharge from 7.5% to 5%. The reduction in effective corporate tax rate will not have an immediate impact on account of accumulated losses. 2. 2 The tax authorities h Th t th iti have b been given i additional powers to seek information regarding use of Double Taxation Avoidance Agreements. These powers could be used by the tax authorities to examine tax efficient structuring of aircraft leases, amongst other transactions.

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Indirect tax proposals

The aviation industry has faced the brunt of the economic down turn and most players in the industry have incurred significant losses. However, rather than easing the burden on the industry, most of the indirect tax proposals seek to increase the tax incidence. The following changes have been proposed in the Finance Bill 2011:
Customs

The rate of service tax on travel by air are being increased as follows:
SL 1 2 3 Travel Type Domestic Travel (Economy Class) International Travel (Economy Class) Domestic Travel (Other than Economy Class) Present Rate Rs. 100 Rs. 500 Rs. 100 Proposed Rate Rs. 150 Rs. 750 10%

A basic customs duty of 2 5% is being imposed on 2.5% imports of aircrafts for non-scheduled operations. The exemption from additional duty of customs (CVD) and special additional duty of customs (SAD) would continue. Exemption from education cess and secondary and higher education cess presently available to aircrafts is being withdrawn.

It is proposed that transport of goods by air would be considered as exports as long as the recipient of the service is located outside India. The existing requirement is that the whole or part of the services should have been performed outside India.

Service tax

It is proposed to exempt services for specified purposes provided within a port or an airport which are classified under the Works contract category.

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