PremiumThe covid-19 pandemic has dealt a severe blow to the aviation industry. For no fault of the sector, a large section of flights remains grounded. Complex rules are in place for operating domestic flights, even as people, fearful of the risks to their health, continue to avoid air travel. The severe travel restrictions, including covid testing and quarantine protocols in some states, deter many of those able and willing to fly. The now-discarded rule that barred the sale of middle seats in aircraft--to increase the distance between passengers in row--made many flights unviable. While many of these controls have helped reduce the spread of the virus and the severity of the pandemic, he aviation sector has had to bear the brunt of the costs arising as a consequence of the necessary curbs. Revenues have plunged, and it is bleeding financially. It is understandably looking to the government for support, as soon as in the upcoming Union Budget scheduled to be presented on 1 February.
Even before the outbreak, rising air turbine fuel (ATF) costs and a not-so-favourable taxation structure were squeezing airlines’ finances. Icra Rating estimates that India’s airlines are hurtling towards their steepest-ever cumulative loss of more than ₹20,000 crore in FY22, about 44% more than the ₹13,853 crore loss a year ago.
Given high-skill jobs are at stake, there’s a case for government support. According to a reply in September 2020 from the civil aviation ministry to a Parliament question, the number of employees at airlines dropped by 5,298 from 74,887 to 69,589 between 31 March and 31 July 2020. The drop was 3,246 (from 67,760 to 64,514) at airports and 3,016 (from 37,720 to 29,254) at ground handling agencies. Cargo operators reduced staff strength by 1,017 (from 9,555 to 8,538). A total loss of 12,577 jobs at last count. The number is only likely to have climbed in the last 18 months.
Direct financial support as compensation for lost revenues seems unlikely, given the fiscal constraints and competing demands on the Budget for relief from large sections of the economy, including the poor and vulnerable. The next best form of aid from the Budget is tax concessions.
Ronojoy Dutta, whole time director and chief executive officer, of the largest airline, IndiGo, has sought government support by way of reduction in the Central Excise Tax on ATF to 5% from the current 11%, a longstanding demand. ATF, the biggest cost component for Indian carriers, makes for over 40% of the operating costs. Data on states’ revenues from the value added tax (VAT) on ATF for the last two financial years have not been made public yet. The ministry of petroleum and natural gas data show oil companies collectively paid ₹4,561 crore as VAT on ATF in FY19 to the treasury. This was 32% more than in the previous year. As the ministry pointed out in the Parliament question, VAT collections on ATF form a minuscule portion of the total tax revenues of individual states. In most instances, it is less than 3% of the total VAT revenues and state sales tax collections on select goods. The VAT collections on ATF as a proportion of states is a tiny fraction of tax revenue at the national level – just 0.4 %.
Similarly, concession on service tax on economy-class travel would not greatly reduce the government’s revenues but could incentivise air travellers once the Omicron wave subsides, helping airlines recoup lost revenues to an extent. Rough back-of-the-envelope calculations show that if economy class tickets are sold to the tune of ₹50,000 crore, then the revenue loss to the government will be about ₹2,500 crore.
Eliminating customs duty on the repair of parts and withdrawing customs duty on aircraft imports for the next five years apart from withdrawing service tax on lease rentals are the other options for reducing airlines’ costs. All put together, these tax concessions will cost the Budget less than ₹5,000 crore.
Airports’ finances have taken a hit too. Barring a few airports that remained operational for transport of relief supplies of medicines and food and essential air travel during the stringent lockdowns starting March 2020 can be helped with concessions on the goods and services tax, including by reducing the rate at which it is collected on tickets for airport services to 12%. Correcting the inverted tax structure for the Maintenance, Repair and Overhaul industry will reduce the current dependency of domestic airlines on sending aircraft abroad for major maintenance work.
The fleet of all airlines put together is projected to grow to more than 1,000 aircraft in the coming few years. There is a potential of 200-300 major maintenance checks to be performed in India annually. This represents a direct service revenue potential of more than $80 million (apprx ₹600 crore) and an indirect parts procurement business of $600 million-$ 900 million (apprx ₹4,400 crore to ₹6,600 crore).
