ATF 8 times costlier for domestic carriers: Assocham

ATF 8 times costlier for domestic carriers: Assocham

New Delhi: Domestic aircraft operators pay over eight times higher taxes on Aviation Turbine Fuel (ATF) as these are charged with various tax levies, totaling 66% against 8% on international airlines that fill-in ATF in India and thus erode their annual profitability by 10.5% to 15%, according to a Paper brought out by Assocham on ‘Implications of Higher Tax Incidences on ATF for Domestic Flyers’.

Aircraft traffic in top tier cities in India has grown by 33% in 2005-06 and 14% in 2004-05. Most airports have recorded a growth of over 30% YoY in fiscal 2005-06. Modernization and expansion of the major airports of Delhi, Bombay, Chennai, Kolkata, Hyderabad and Bangalore are expected to facilitate further growth in traffic

“As a result of higher tax incidences on ATF for domestic carriers like sales tax, central excise, import duty and education cess which works out to be 66% as against 8% for overseas airlines, their adverse effect on profitability of full service carrier is estimated at 10.5%. However, on low cost carriers, ATF taxes burden on profitability is assessed around 15%".

If the government reduces sales tax on ATF by about 10% and customs by 4-5% respectively, the domestic aircraft industry can save about Rs5000 crore of annual revenue on it and suitable utilise the amount for building airport infrastructure.

The paper highlights that fuel is the largest component of operating expenses for airlines, accounting for almost 35-40% of their total cost.

Key Findings

* Aviation industry is impacted significantly by multi layered indirect tax system which includes value added tax, service tax, excise duties and custom duties

* Impact of indirect taxes is not uniform and there is substantial variation between tax treatment under various legislation for different types of aircraft carriers which need to be corrected

* Scheduled operators in aviation industry have largely been protected from impact of custom duty on import of aircrafts or parts of aircrafts into India

* Scheduled aircrafts are exempt from payment of excise duty on aircrafts manufactured in India, whereas aircrafts are used to operate on a scheduled route

* Increasing disposable income coupled with greater consumerism has added in placing air travel as an alternative choice for upper middle and middle class which presently account for over 1/4th of Indian households and continuing high tax incidence will adversely effect movement of middle class via aircrafts

* Emerging middle class along with upper and upper middle population will grow to nearly 40% of total population by 2007-08, whose size is likely to go over 55% in next 3 years and further enhance huge demand for air travel services

* Increase in trade activities within the nation is also leading to development of various mini metros which results in demand for more routes that were hitherto unviable for airlines to operate

* While until lately, target category of households was only upper middle to high-income categories, drop in fares and conversion of premium rail travelers to air travelers could result in widening addressable market to cover even middle income households

* Addressable population for airlines industry is likely to grow by 10% YoY in next three years along with increasing emplanements

* Indian aviation sector has shown an impressive growth after the arrival of several low cost carriers since 2003, and growth was witnessed in both passenger and cargo traffic

* Passenger traffic maintained a CAGR of 19% from fiscal 2002 to fiscal 2006 (from 12.8 million to 25.5 million) in domestic sector and CAGR of 13.7% from fiscal 2002 to fiscal 2006 (from 12.7 million to 21.2 million) in international sector