The domestic aviation sector, down with tepid growth, will get a shot in the arm from the Centre’s decision to reduce the corporate tax rate, experts said.
The lower corporate tax is expected to boost overall consumption and drive growth in a slowing economy, which in turn could translate into higher corporate spending on travel.
“The slashing of corporate tax rates means that there will be a higher level of profit retention for corporate India, which will take away some of their cost pressures," said Sharat Dhall, chief operating officer, business-to-consumer, Yatra Online. “Corporate travel, as a result, should get a lift by the latest announcement. This will, however, not result in lower fares, but better demand for airlines."
Finance minister Nirmala Sitharaman cut corporate tax rate for companies that do not avail tax incentives from 30% to 22%. Effectively, the tax rate, including surcharge, will be 25.17%.
According to the new regulations effective 2019-20, new manufacturing companies will now have to pay an even lower corporate tax of 15%.
The tax relief is part of the government’s move to deal with the slowdown, after consultations with the industry on a weekly basis, Sitharaman said.
The move comes after air passenger traffic slowed for the third straight month in August. In June, domestic airlines flew 12.03 million passengers, while in July and August passenger traffic stood at 11.90 million and 11.79 million, respectively.
Domestic air passenger traffic is estimated to grow 6-8% this fiscal year, primarily due to the grounding of Jet Airways, said a September research report by CRISIL Ltd.
“This is way below the 14% growth logged in fiscal 2019, and the compound annual growth rate (CAGR) of 18% seen in the past five years, but is higher than our earlier estimate of 2% growth, and factors an upward revision in capacity addition plans of LCCs (low cost carriers)," the report added.
The finance minister’s decision to reduce corporate tax will revive growth, SpiceJet Ltd’s chairman Ajay Singh said in a statement. “It will improve sentiment and go a long way in reviving growth, investment and demand," he added.
Indian airlines, except for low-cost carriers such as IndiGo, SpiceJet and GoAir, are largely loss-making entities.
AirAsia India and Vistara, which started operations in the past five years, haven’t yet broken even.
Jet Airways, meanwhile, has been grounded due to its inability to service debt.
“The reduction of corporate tax rate will not translate into lower airfares, but on the contrary, if demand picks up, airlines will only hike fares," said an airline official, requesting anonymity.
“However, many airlines are financially in the red. If consumption improves as a result of the tax cut, airlines will be able to report stronger financials in the coming quarters," the person added.