From cost perspective, one of the primary focuses of the industry is on ATF which usually accounts for 30-40% of the operating cost of carriers. The industry would like the Government to give ATF a 'declared good' status which would rationalise the sales tax/VAT, thereon such that it is scaled down from the current range of 5-30% to 4-5%. Further, since the excise duty on such ATF is a significant cost, the government should sincerely look at providing a mechanism to take credit for such duty paid on such ATF against service tax payable on air travel. These two measures alone will result in significant cost advantage to the aviation industry.

Clarity on issues regarding taxability of various types of leasing expenses is also a critical requirement to motivate the aviation industry in going ahead to lease more and more aircrafts and hence contribute to the growth of the Indian aviation sector. Since lease agreements as a norm break leasing payments under various nomenclatures, there is constant controversy regarding its exemption from withholding taxes under the double taxation avoidance treaty provisions.

Currently, such controversy costs the industry severely when it needs to pay such withholding taxes on lease payments on its own account. The industry would feel far relaxed from such uncertainties if the budget could reinstate section 10 (15A) of the Income Tax Act, which permitted exemption from withholding tax on aircraft lease rental payments and obligations arising out of lease agreements.

From operational perspective, the aviation industry faces severe direct tax withholding responsibilities on numerous technologies/services which the industry needs to mandatorily source from outside India. Most of such global large technology/service-providers are not keen to be entangled with Indian tax compliances including obtaining permanent account number (PAN) and hence undertake net of tax contracts where by all responsibilities are on the industry.

Since the taxation laws apply a penal tax withholding rate of 20% in the absence of PAN, the industry needs to gross up such payments and bear the same. This results in increasing the cost of such technology/services by more than 25% which costs dearly to the cash strapped industry. The government should look at easing such requirement by clarifying the right approach in such peculiar circumstances so that the costs can be brought down.

Fund infusion by international airlines into ailing Indian aviation sector is an issue which has proponents on either side. Views which favour such initiative seem to be keenly awaiting the regulatory easing of foreign direct investment (FDI) in the aviation sector so that international airlines are able to participate financially and in return inculcate the best operational practices into the industry. What path the government takes would be interesting to view.

It needs to be zealously seen how the Budget 2012 infuses growth measures into the aviation industry and opens roads towards development of the same to be a sustainable and profitable industry.

Source: Moneycontrol.com, India,  dated 09/03/2012