A simple merger between Deccan Aviation Ltd, which operates Deccan, India’s biggest low-cost carrier, and Kingfisher Airlines Ltd, is being ruled out by senior executives at UB Group, which owns Kingfisher, over a tax clause that denies aviation companies the benefit of carrying forward and setting off losses against future profits in the event of an amalgamation.

Kingfisher Airlines has accumulated losses of some Rs1,200 crore and Deccan Aviation has losses of at least Rs800 crore, which, if they continue as separate firms, can be set off against profits, potentially saving up to 22.66% in taxes—equivalent to Rs453 crore. This is because they will not have to pay tax at the 33.99% corporate tax slab, but at the 11.33% minimum alternate tax (MAT) rate until such time that accumulated losses are made up in subsequent profits.

The benefit on taxes could be substantially more than Rs453 crore as both the aviation firms are expected to make more losses in months to come before making any profits.

The unlisted Kingfisher Airlines, which, through a clutch of group companies, now owns 46% of Deccan Aviation and runs the low-cost carrier, has been contemplating merging into the low-cost airline firm to take advantage of the latter’s right—starting early next year—to fly on international routes from India. Indian aviation rules mandate a five-year domestic flying experience before airlines can fly overseas. Kingfisher, on its own, is just two-and-a-half years old.

A final decision on a merger—or not—is only likely after Accenture Ltd, the consultants appointed to advise on how to best combine operations of the two airlines, makes its recommendations. “A straightforward merger is ruled out unless we want to forego benefits of the losses," says Ravi Nedungadi, group chief financial officer of UB Group, which takes its name from the Bangalore business house’s flagship United Breweries Ltd.

Still, Kingfisher has plenty of options.

“What they can do is start an international division within Deccan, and call it Kingfisher International or whatever they want," said Girish Vanvari, executive director of KPMG India Pvt. Ltd.

Nedungadi said Kingfisher Airlines “could look at divisions", but did not elaborate whether such a structure was being considered. “Nothing has been finalized yet," he said, adding that licensing the Kingfisher brand to Deccan was not an option—for now.

Accenture’s recommendations, expected to be made shortly, will be discussed on 19 December at a board meeting of Deccan Aviation, UB chairman Vijay Mallya said earlier this week in New Delhi.

A merger, making Kingfisher and Deccan a single company, will allow the Mallya airline to fly abroad, civil aviation minister Praful Patel said on Tuesday.

Indian tax laws, under Section 72 (a) of the Income-tax Act, 1961, allow manufacturing, banking, telecom and software companies that merge to carry forward their accumulated losses and set them off against their future profits, said KPMG’s Vanvari. The government, earlier this year, had arranged for a one-time exemption to the policy for the merger of Air India and Indian Airlines.

“The two airlines can still operate separately and exploit cost advantage—they have common fleet…both of them as stand-alone (operators) can aim to be profitable," said a sector analyst, Centre of Asia Pacific Aviation’s Kapil Kaul.

Kaul reasoned that as the airline industry matures in India and airlines turn profitable by fiscal 2010, the valuations of low-cost airlines will be higher.

“Because largely the future will be guided by low-cost airlines in domestic and regional international operations," he added.


(P.R. Sanjai contributed to this story.)