New Delhi: The domestic aviation sector, struggling with tepid growth, will get a shot in the arm from the finance minister's announcement to reduce corporate tax, aviation sector experts told Mint.

The government’s decision is expected to boost overall consumption, drive growth in a slowing economy, which in turn could translate into higher corporate spending on travel.

Finance Minister Nirmala Sitharaman on Friday announced a cut corporate tax rate for domestic companies that do not avail of any tax incentive to 22%. Effective corporate tax rate after surcharge will be 25.17%. New manufacturing companies will have to pay an even lower corporate tax rate of 15%.

"The slashing of corporate tax rates means that there will be higher level of profit retention for corporate India, which will take away some of their cost pressures," said Sharat Dhall, chief operating officer (B2C) of 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 the airlines."

The tax relief is part of steps the government has been announcing after consultations with the industry, on a weekly basis, to deal with the slowdown.

The tax relief measures comes at a time when the air passenger traffic slowed for third straight month in August. Hit by market uncertainties in a slowing economy and a lean travel season, domestic scheduled carriers carried 11.79 million passengers last month, compared with 11.90 million in July, showed data issued by the Directorate General of Civil Aviation (DGCA) on Thursday.

“The domestic air passenger traffic is forecast to grow 6-8% this fiscal, mainly due to non-revival of Jet Airways," said a September research report on the domestic aviation industry titled 'The ascent of profitability' by CRISIL Limited.

"This is way below the 14% growth logged in fiscal 2019 and the compound annual growth rate (CAGR) of 18% seen in the last 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 in a statement. "It will improve sentiment and go a long way in reviving growth, investment and demand," Singh added.

Indian airlines, except for low cost carriers like IndiGo, SpiceJet and GoAir, are largely loss-making entities. Some airlines like AirAsia India and Vistara, which started their operations in the last five years, are yet to break even. Jet Airways, meanwhile, has been grounded due to its inability to service debt.

Aviation stocks traded on a mixed note following the announcement of the cut in corporate tax rate. IndiGo’s shares rose 1.96% to 1727.60 on the BSE, while the benchmark Sensex gained 5.32% to 38,014.62 points. Ajay Singh-led SpiceJet Ltd's shares, however, fell 0.32% to 124.65.

"The reduction of corporate tax rate will not translate into lower air fares but on the contrary if demand picks up, airlines will only hike fares," said an airline official, who requested anonymity.

"However, many airlines are financially in a red. If consumption improves up as a result of the tax cut, airlines will be able to report stronger financials in the coming quarters," the person added.

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