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India Budget 2010: Impact on the aviation sector

Keeping in mind the five year term of the Lok Sabha, the first year is the thank you budget, years two and three are the hard and bold budgets, year four is the status-quo budget, and year five is the populist budget meant to garner votes. With coalition politics in full sway, the union budget is also now subject to election needs of regional coalition partners like the TMC, DMK, and the NCP.

Mr. Mukherjee faced no election pressures this year, year two, of the UPA’s second term. With no election pressures, the Finance Minister of India, Mr. Pranab Mukherjee missed a golden opportunity to take some bold initiatives in Budget 2010.

He did however raise indirect taxes by almost Rs. 46,000 crores which also includes re-introduction of customs and excise duties of petroleum products. He also broadened the base of services which will now come under the service tax net.

Service tax of 10.24% which until now was levied only on international travel in business and first class and showed up on tickets as JN has now been expanded to include all classes and all travel. My understanding is the the service tax will be levied on the total ticket price excluding the statutory taxes of governments.

The scope of the taxable service ‘Air Passenger Transport Service’ [section 65 (105) (zzzo)] is being expanded to include domestic journeys, and international journeys in any class.

Airports have not been spared either. Service tax is now levied on all services provided at airports, whether to passengers, or importers/exporters, or to airlines. There will be a price rise along the entire value chain.

The definitions of the taxable services, namely the ‘Airport Services’ [section 65 (105) (zzm)], the ‘Port Services’ [section 65 (105) (zn)] and the ‘Other Port Services’ [section 65 (105) (zzl)] are being amended to provide that,-

  1. all services provided entirely within the airport/port premises would fall under these services; and
  2. an authorization from the airport/port authority would not be a precondition for taxing these services.

On the fuel front, air passengers are going to feel the pinch when the oil marketing companies revise the price of aviation turbine fuel on March 1, 2010. With global crude prices increasing sympathetically with increasing demand as Asian economies recover, the effect is going to multiply.

Unlike 2008, airlines now are smarter, and with reasonably healthy demand, will be quick to pass on the fuel price increases in the form of increased fuel surcharges.

Everyone transacting at an airport, including passengers, can get ready for serious price jumps.

This does raise an interesting situation. Asian economies are recovering and forcing an increase in global fuel prices, which is impacting the whole world. The United States and European economies are still very fragile and residents of these countries face the daunting prospect of an expensive summer season without a corresponding income generation.

Coming back to India, the lack of credit off-take is symptomatic of the lack of capacity augmentation to cater to the rapidly rising demand and this is reflected in the supply shortage inflation the country is experiencing. With the new taxes announced today, Petrol is already up almost Rs. 3 and diesel by almost Rs. 2 per litre. These increases will only add to the inflation spiral as price of goods and services will increase.

The inflation spiral will force demands for salary increments from staff and price increases from vendors, both of which were suppressed until now thanks to the economic slowdown. The improving economy is also putting pressure on the HR front as more job opportunities open up, and there is bound to be attrition which will increase costs due to recruitment and training. Vendors too, have more market opportunities, and both airlines and airports will be hard pressed to retain suppliers.

Low fare airlines face the dilemma of passenger demand that is price sensitive. For full service airlines, premium and business traffic is generated by fresh investment by industry, and the lack of credit off-take is a cause for concern. The customers of airports, are airlines, and troubles flow downhill.

Clearly tough times are ahead.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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