Global aviation leaders call India’s service tax on aircraft leasing, regressive

Global aviation leaders at the Farnborough international air show 2014 termed India’s decision to levy service tax of 12.36% on aircraft lease charges as a regressive step which will only hurt India’s already over-taxed airlines.

India's finance minister Arun Jaitley with commerce & Industry minister Ms. Nirmala Sitharaman, and bureaucrats who prepared the budget
Indian finance minister Arun Jaitley and commerce and industry minister Nirmala Sitharaman, and bureaucrats who prepared the budget levying service on aircraft lease rentals. Photo courtesy PIB India.

As per a report in The Mint, the maiden Union budget of the Narendra Modi led NDA government proposes to levy the service tax effective October 1, 2014. With over 350 leased aircraft aggregating lease rentals of about Rs. 1,500 crore (approximately $250 million at Rs. 60 to a US Dollar), the 12.36% tax will hit airlines to the tune of Rs. 185.4 crore (approx. $31 million).

C. Jeffrey Knittel, President, Transportation Finance for global aircraft leasing major CIT, told Bangalore Aviation “Increases in tax structure will ultimately flow to the customer. It is a known fact that the airlines and aircraft are already over-taxed in India. I don’t know how increasing the tax burden on already over-burdened airline industry in India is going to help the government grow the Indian economy and reverse the decline.”

Calling the move regressive, Dick Forsberg, Head of Strategy for Avolon one of the world’s largest aircraft lessors said “Indian carriers are already facing severe headwinds due to the poor and adhoc policies of successive governments.” “Archaic rules like the five year, twenty aircraft rule to fly overseas which are put in place by vested interests, and myopic policies which are supposedly designed to protect Air India but end up forcing Indian carriers to hugely under-serve the international market add to the problems. This in turn forces Indian passengers to increasingly rely on foreign carriers which make them [the foreign airlines] virtually unbeatable in India itself.” He added that the Indian government should realise the value of the aviation industry and the role it plays, especially in an economy emerging onto the world stage, and must help it become globally competitive.”

AirAsia group CEO Tony Fernandes, in an exclusive conversation with Bangalore Aviation said “It’s a negative stop. The government is new at this and may not recognise the role aviation plays in the economy.” He, however, put the onus on the leaders of India’s airlines saying “Industry has done a poor job explaining its position and problems to the government. We need to improve this.”

A top tier management executive at one of top two airframers told us “This is a bad step.” He however did not wish to be identified.

India forgotten at Farnborough show 2014

Two years ago, India and its civil aviation industry were the talk of the Farnborough air show. In 2014, India was all but forgotten.

In countless briefings by aircraft manufacturers, lessors, analysts, India was not even mentioned. In global aviation forecasts, India does not feature any more.

The aviation, especially the commercial airline industry is a vital contributor to any economy. Qatar Airways alone contributes over 11% of the GDP the gas-fuelled island state economy. At the Dubai air show in 2013, just the value of aircraft orders placed by the middle-east airlines was greater than the total tax collections of India for the year.

When will our so-called leaders, even a supposedly dynamic duo of Narendra Modi and Arun Jaitley realise that the airline industry has already been taxed close to death. Most airlines are already on life support. Instead of addressing the plight of the industry and the excessive taxation it suffers they insist on adding this regressive service tax which may just be the last straw.

Ache din will not come, they need to be brought in and nurtured.

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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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