New Delhi/Mumbai: Air fares may go up in the coming days after the Union budget proposed to increase excise duty on jet fuel to 14% from 8%.

Jet fuel is the biggest cost for airlines and many airlines returned to profits in 2015-16 after years of losses, thanks to a global oil price slump.

According to an airline official who asked not to be identified, the actual impact will be even higher, since sales tax is calculated over and above excise duty. State-level sales taxes vary between 4% and 30%. Airlines have been lobbying for lower sales tax for over a decade.

“It will have a cumulative impact," the official quote above said, “This is not very encouraging."

In 2015, Brent crude fell 35% and so far this year, it has dropped 5.4%. However, airlines will face more heat when oil prices start to rise. On 20 January, Brent crude hit a low of $27.88 and since then, it has gained over 26.4%.

The duty hike will make jet fuel costlier by around 4-5%, Amber Dubey, partner and head, aerospace and defence at KPMG India, said.

“At a time when ATF (aviation turbine fuel) in India is 60-70% costlier than global ATF prices, it goes against the government’s stated objective to make flying affordable for the masses," Dubey said.

However, excise duty on ATF for supply to scheduled commuter airlines from regional connectivity scheme airports (read airports in Tier II and III cities), will remain unchanged.

The proposal to increase the tax on ATF will result in increase in airfares and dampen air passenger growth, said Sharat Dhall, president, Yatra.com.

However, K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte Ltd in Singapore and former vice-president (commercial strategy and investor relations) at Jet Airways Ltd, said this will not have a major impact on airlines’ profits as oil prices are down and airlines have the scope to pass it on to passengers with traffic growing at 20% in India.

“Airlines were paying around 5% of customs duty when oil was at $100 per barrel. It has come down and the government is finding a way to boost its revenue prospects. In any case, this proposed increase will have only incremental impact," Vishwanath said.

Shares of all three listed airlines—Jet Airways (India) Ltd, InterGlobe Aviation Ltd (IndiGo) and SpiceJet Ltd—fell after the announcement.

Besides the excise duty hike, the minister has also increased service tax through the introduction of a new 0.5% Krishi Kalyan cess that will also add to airfares.

On the brighter side though, Jaitley said the government is drawing up an action plan to revive unserved and underserved airports.

There are about 160 airports and air strips with state governments which can be revived at an indicative cost of 50-100 crore each, he said.

“We will partner with the state governments to develop some of these airports for regional connectivity. Similarly, 10 of the 25 non-functional air strips with the Airports Authority of India will also be developed," he said in his speech.

To be sure, there are 15 airports developed by the government for about 430 crore, which have received no flights in the last decade.

Jaitley also announced reforms for the aircraft maintenance sector. Tools and tool kits used by aircraft maintenance operators in India will be exempted from excise, custom duty and other duties.

The budget also said it will make easier the procedure for availment of exemption from customs duties on parts, testing equipment, tools and tool-kits for maintenance, repair and overhaul of aircraft simplified based on records and subject to actual user condition.

In an important step, the restriction of one year for utilization of duty-free parts for maintenance, repair and overhaul of aircraft has also been removed.

Kabir Bogra, associate partner, Khaitan and Co., said customs duty exemption has been extended to a wider variety of equipment and tools required to be imported by a aircraft maintenance repair and overhaul (MRO) service provider and customs duty on aircraft imported for undertaking repairs has also been completely exempted.

“In fact, the exemption has been completely streamlined with operational procedures followed by airlines and an international airline can fly into India with passengers, get the aircraft serviced and thereafter use it to fly passengers from India. This has been much delayed but yet a welcome move and may yet help in establishing India as a preferred MRO destination," Bogra said.

India has been losing out on aircraft maintenance to smaller countries like Sri Lanka where it is 40% cheaper.

The Union budget for 2016-17 also allocated 1,713 crore to Air India, the state-owned airline which is surviving on a bailout package.

Air India had asked for 3,901.49 crore for the upcoming financial year as part of a 30,000-crore package granted by the government in 2012 to revive India’s oldest airline.

Air India has received 3,300 crore in the current fiscal.

The airline has so far received 22,280 crore equity since the bailout package was granted.

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