4 min read.Updated: 05 Jul 2019, 04:47 PM ISTRhik Kundu
The government will also implement measures to make the country a hub of aircraft leasing and aviation finance
Increasing FDI limits in aviation is likely to help troubled airlines such as Air India and Jet Airways find buyers
Mumbai: The government has proposed to hike the foreign direct investment ( FDI) limit in domestic air carriers from existing 49%, finance minister Nirmala Sitharaman said in her maiden budget speech on Friday.
"The government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders," Sitharaman said.
The push from the government to increase FDI limits in aviation could help troubled airlines such as Air India and Jet Airways, which had been grounded since 18 April due to an acute fund crunch, find buyers.
“As the world’s third-largest domestic aviation market, the time is ripe for India to enter into aircraft financing and leasing activities from Indian shores. This is critical to the development of a self-reliant aviation industry, creating aspirational jobs in aviation finance, besides leveraging the business opportunities available in India’s financial special economic zones (SEZs), namely, International Financial Services Centre (IFSC)," Sitharaman said in her budget speech. The government will implement the essential elements of the regulatory roadmap for making India a hub for such activities, he added.
The finance minister also said the government was keen to provide an enabling ecosystem for growth of maintenance, repair and overhaul (MRO) industry in the country to achieve self-reliance in the aviation sector.
“The government will adopt suitable policy interventions to create a congenial atmosphere for the development of MRO in the country," Sitharaman added.
At present, most Indian airlines lease aircraft from overseas-based companies due to a dearth of domestic options. Most Indian carriers service their aircraft abroad as domestic MRO attracts high taxes, which further increases costs of airlines.
The government’s emphasis on the MRO sector found resonance among local service providers.
"The MRO Association of India thanks the Indian Government, especially the Ministry of Civil Aviation, The Ministry of Finance and the Office of the Prime Minister for recognizing the potential and opportunity present by MRO industry," said Bharat Malkani, president of the MRO Association of India, in a statement.
“We are confident of turning India from an importer of MRO to a net exporter and create over 100,000 direct jobs and revenues exceeding ₹35,000 crore in the next five years," Malkani added.
Aerospace manufacturers Pratt & Whitney's India managing director Palash Roy Chowdhury said the government’s plans to adopt suitable policy intervention in the MRO sector will not only boost the local industry but contribute to the government’s tax revenues.
“We look forward to the much-needed government support that will enable the local MROs to compete with foreign ones which enjoy a more favourable import tax regime," Roy Chowdhury added.
Sitharaman however didn’t explicitly mention the measures that the government will take to make the country a hub of aircraft lease and aviation financing, both in her speech and in the budget documents. The minister also didn’t elaborate on the policy intervention it plans to bring about in the MRO sector.
Meanwhile, one of the key demands of the aviation industry, to reduce taxation on aviation turbine fuel (ATF) or jet fuel, was not addressed by the government in the latest budget. At present, jet fuel accounts for about 35%-50% of airline’s costs. The domestic aviation industry has been lobbying to include ATF under the GST (Goods and Service Tax) regime.
“The non-inclusion of ATF in the GST regime is extremely disappointing for the long term viability of the aviation sector," said Anuj Prasad, Partner, Shardul Amarchand Mangaldas & Co.
“(While) the increase in FDI limits in the sector probably comes too late for Jet Airways but may enable Air India privatization," Prasad added.
Some aviation sector officials were even disappointed not to find anything ‘concrete’ in the budget for the sector.
“We though there will be a major roadmap to bring down taxes on ATF and even bring it under GST regime. We also thought that the government will lower the taxes on MRO (currently at 18%). However, none of this happened," said an official with an Indian airline, who requested anonymity.
“There isn’t anything concrete on the aviation sector in the budget. We will wait till further announcements on ‘suitable policy interventions’ are made in the policy front," the person said adding, “At present Indian airlines go abroad to service their aircraft since domestic taxes on MRO are very high. I don’t see this changing unless taxes are brought down."
An aviation consultant told Mint under the conditions of anonymity that the 2019 union budget had nothing new for the aviation sector that hasn't been already discussed by the current government.
“The government has been talking about making India a hub of aviation finance leasing, apart from MROs, for some time now. But, unless, it gives tax exemptions and creates a robust mechanism that prevents double taxation, foreign leasing companies will not be interested to set up business in India," the consultant said adding that none of these have been addressed in the budget.