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Civil aviation: liberalization of policy on FDI finally gives due attention to the sector

Civil aviation: liberalization of policy on FDI finally gives due attention to the sector
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First Published: Sun, Apr 20 2008. 11 00 PM IST

Updated: Sun, Apr 20 2008. 11 00 PM IST
The Centre for Asia-Pacific Aviation has predicted that India’s domestic traffic will grow at 25-30% a year until 2010 and international traffic by 15%, taking the overall market to more than 100 million passengers by the end of the decade. Currently, the operating fleet size is of 310 aircraft and Indian carriers have placed an order for 480 aircraft to be delivered by 2012. Clearly, the growth of the economy along with rising incomes, as well as the advent of low-fare airlines, have taken the civil aviation industry into a different orbit.
The high cost of aviation turbine fuel, attrition and high cost of people are the flip sides to this opportunity for the civil aviation sector. Clearly, this is an industry in transition and like the software industry a few years ago, perhaps needs some special attention. In this light, the recent liberalization in the foreign direct investment, or FDI, regime through Press Note No. 4 (2008) is welcome.
The government has liberalized and amplified the scope of activities covered under the existing policy for the civil aviation sector. The objective seems to invite foreign investment in the air transport services (ATS) as well as ancillary services.
The old and the new
In the old policy, the scope of FDI in the civil aviation sector was limited to airports and ATS. Till now, 100% FDI was allowed in greenfield airport projects under the automatic route, subject to sectoral regulations notified by the civil aviation ministry. FDI in existing projects up to 100% was also allowed, again subject to ministry regulations, but prior approval was required for investments beyond 74%.
For ATS, the FDI cap was 49% generally, but 100% for non-resident Indians, or NRIs. However, there was a ban on direct or indirect equity participation by foreign airlines.
There is no change in the policy for the airport activities. But the proposed policy now amply clarifies that ATS includes domestic scheduled passenger airlines, non-scheduled airlines, chartered airlines, cargo airlines and helicopter and seaplane services. The civil aviation sector also includes other services such as ground-handling services, maintenance and repair, training institutes and technical training institutions, and the FDI policy on these is also sought to be amplified.
Following the revised policy, the government has further opened the doors for foreign investment in all the above-mentioned activities and also for foreign airlines in certain activities, for instance, in cargo airlines and helicopter/seaplane services. Moreover, there has been no change in FDI norms in scheduled ATS/domestic passenger airlines, while the FDI cap for non-scheduled ATS, non-scheduled airlines and charter airlines has been raised to 74% for non-NRIs, from 49% earlier. (The FDI cap for NRIs was and is 100%.)
Air transport services
As of now, foreign airlines are not allowed, but clearly, FDI being allowed itself is a step in the right direction.
On the other hand, the FDI regime for cargo airlines, helicopter and seaplane services is even more liberal. This is in two respects:
* FDI up to 100% is allowed (74% for cargo airlines).
* There is no restriction on foreign airlines to participate.
Clearly, this will give a boost to cargo airlines and helicopter and seaplane services, both in terms of investment and in terms of operating know-how.
Ground handling
Investment in ground handling services would facilitate the provision of services that would be of international standards. “Soft skills” is becoming an issue; in that context, permitting FDI in flight training institutions would enable airlines to groom their crew and staff.
The opening of technical training services coupled with express permission for maintenance and repair services is a welcome step. The technical training institutions would groom the technicians. These technicians would assist the companies providing maintenance, repair and overhaul (MRO) facilities. At present, most aircraft are taken on lease. MRO facilities are located overseas. With the opening of foreign investment in MRO services, it would encourage foreign aircraft companies to set up MRO facilities in India. This would save both turnaround time and costs.
The proposed policy is, of course, subject to the aircraft rules, civil aviation requirements and aeronautical information circulars as notified by the ministry of civil aviation.
Some tax issues
It is important to look at certain non-FDI issues also in the context of the civil aviation industry needing holistic attention.
Under existing tax laws, lease rentals paid in respect of a lease arrangement entered into on or after 1 April 2007, between an Indian company engaged in the business of operation of aircraft and a foreign company, are liable to tax. Accordingly, the Indian companies are liable to withhold tax on such payment. Generally, the lease arrangements are structured in such a manner that the tax incidence is on the account of the lessee, that is, the Indian company. The tax borne by an Indian company is not taxable in the hands of the foreign company. While it is sometimes possible to eliminate the tax cost on dry leases by structuring the transaction through a favourable tax jurisdiction such as that in Ireland or Belgium, if the tax break on lease rentals had been extended for a few more years, it would have been a significant boost to the civil aviation industry.
In the recent past, the civil aviation sector has been witness to some consolidation. Existing tax laws grant the benefit of carry-forward and set-off of accumulated losses and unabsorbed depreciation in the case of amalgamation or demerger of public sector companies only. Depriving private sector companies of such legitimate benefits is also detrimental to the growth of this sector. One hopes that this aspect will be looked into.
Summing up
The recent FDI liberalization is indeed most welcome, both in terms of the relatively liberal framework and in terms of the clarity. Clearly, the importance of civil aviation is being recognized. It is also recognized that good airports, a choice of airlines and good ground handling facilities are integral parts of infrastructure and are needed if the growth rate is to be sustained. From that perspective, a holistic view of FDI, outbound regulations, tax issues including tax on aviation turbine fuel, etc., should be seen in an integrated manner. One hopes that political compulsions will not stand in the way of the growth of this important sector.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at groundrules@livemint.com
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First Published: Sun, Apr 20 2008. 11 00 PM IST
More Topics: Civil Aviation | Liberalization | FDI | ATS | Tax |