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Union Budget 2012-13: Impact on the Aviation sector

Grant Thornton India LLP. All rights reserved.

Union Budget 2012-13 | Impact on the Aviation sector

Contents
03 | An overview 04 | Key expectations 05 | Direct tax proposals 06 | Indirect tax proposals 09 | Our offices

Union Budget 2012-13 | Impact on the Aviation sector

An overview

As the aviation industry in India completes a 100 years, domestic service providers are soaring to greater heights in international airspace. While the industry has seen its setbacks and is seen to be flying through turbulent times, this budget has not done too much to help. The aviation sector is an important infrastructure and a prime driving force for the social - economic growth of the country. Massive investments have been made in the recent past to upgrade the airport facilities, and India can now boast of world class airports. However, barring a few airlines, most of the operators have been struggling with losses and working capital deficit, which in some cases are so huge that they find themselves perilously close to shutting shops. The increase in the market size has been outpaced by the growing competition between the Indian carriers, leading to intense price competition. This coupled with the high operating costs have made the survival difficult for most of the players. The proposal to allow External Commercial Borrowing ('ECB') to fund the working capital requirements of the sector would definitely provide an avenue for raising debt in a

scenario where the borrowing from Indian banks have not been forthcoming. A withholding rate of 5% will make lending to the Indian carriers attractive, however, the ECB has been opened for only one year. This timeframe may be too short for the operators to come out of cycle that they are in. Though the Government may be contemplating extending the window later in the year, however, if the ECB window is made to match the beneficial tax rate (the beneficial rate of 5% is available till 1 July 2015), the operators will be in a better position to negotiate the terms with overseas lenders. Though the airlines are now allowed to import Airline Turbine Fuel ('ATF') directly as per their actual use, it is yet to be seen whether the airlines will be in a position to make the investment required for storage and logistics. Direct import of ATF is otherwise to save the state sales tax/VAT ranging between 5% to 30%. Overall, it is not a disappointing budget for the sector. Alternative finance options for funding working capital and potential reduction in ATF price on direct import and reduced customs duty on many items including ATF, should provide the necessary impetus for the airline operators to tide through the difficult times.

Union Budget 2012-13 | Impact on the Aviation sector

Key expectations

The Indian aviation industry was pinning hopes on the Union Government to provide tax incentives and relax Foreign Direct Investment ('FDI') norms in the upcoming budget. Some of the their key expectations were Airline industry be declared as Core Infrastructure and all consecutive incentives to be made available to the sector To categorise the ATF as "declared goods" to scale down the spiraling taxes which results in ATF accounting for almost half of the operating cost. It may be noted that recently the airlines were allowed to import ATF directly, which would result in huge saving from state sales tax. However, this would involve investment in infrastructure for logistics and storage. Extend the benefit of carry forward of losses to private airline sector in case of amalgamation/merger of aviation companies to enable them to restructure Exemption from paying service tax on imported services under reverse charge mechanism Ease foreign investments norms for the sector, considering the Government is estimating potential to absorb US$120 billion by 2020

From an operational perspective, important clarification on various withholding tax issues such as withholding taxes on routine maintenance of spares majorly carried on in facilities outside India withholding taxes on Passenger Service Fee ('PSF') and User Development Fee ('UDF') which is collected on behalf of the Airport Authority of India. Reinstatement of Section 10(15A) of the Income Tax Act, 1961 ('IT Act') thus allowing leases for aircrafts/engines to be exempt for the non-resident lessor. This exemption was discontinued for lease agreements which are entered into after 1 April 2007 Tax incentive for development of Maintenance Repair and Overhaul ('MRO') facility will not only help airlines to reduce cost of such repairs, presently carried overseas, but will also help develop India as a hub for such facility.

Union Budget 2012-13 | Impact on the Aviation sector

Direct tax proposals

Income-tax Act, 1961

Foreign Exchange Management Act, 1999

No change in the corporate tax rates Direct Tax Code (DTC) which was proposed to be implemented from 1 April 2012 has been deferred Tax to be withheld at a reduced rate of 5% (plus applicable surcharge and cess) on interest payments made to a nonresident who lend money to a company, in the business of operation of aircraft, between 1 July 2012 to 1 July 2015 This will be effective from 1 July 2012

ECB allowed for funding working capital requirements for airlines upto US$1 billion, but only for a year Proposal to allow foreign airlines to participate upto 49% in the equity of an Indian air transport undertaking under active consideration of the Government. Presently, FDI is allowed upto 49% under automatic route for scheduled air transport/domestic scheduled passenger airline, however, no foreign airlines are allowed to participate directly or indirectly in the equity except for cargo airlines

Union Financial Budget 2012-13 | Impact on the Aviation sector

Indirect tax proposals

Service tax

Customs duty

Rate of service tax is proposed to be increased from 10% to 12% Introduction of the negative list concept - following relevant services are on the negative list and proposed to be exempted: services for transportation of goods by an aircraft from outside India Service tax on domestic and international airfares is proposed to be revised to 12% ad valorem with a 60% abatement and a condition that no credit on inputs and capital goods is allowed

Direct import of ATF is now allowed for Indian carriers as actual users Reduction in Basic Custom Duty ('BCD') on the following items:
Item
Tyres (New) Tyres (Re-treaded) Gliders Parts of aircraft Aviation Turbine Fuel Helicopter

Current rate
3% 10% 10% 3% 14% 10%

Proposed rate
NIL NIL NIL NIL 8% 2.5%

Central Excise

Bbasic rate of duty increased from 10% to 12% and merit rate increased from 5% to 6%

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