Blunder, Thy name is Budget 2016 !

Blunder, Thy name is Budget 2016 ! 

Particularly so in the context of Indian Civil Aviation.

The Civil Aviation Ministry mooted the idea of SCAs and Regional Connectivity Scheme (RCS) in its Draft Civil Aviation Policy (DCAP).

The Finance Minister Arun Jaitley came up with a proposal in Union Budget 2016-17: "The excise duty on aviation turbine fuel (ATF) be hiked to 14% from 8%, though not applicable to SCAs under the RCS."

The government had earlier reduced customs duty on crude oil imports to 0 from 5% in June 2011 when oil prices were over USD 100 per barrel. But with International oil prices slumping to 12-year low, hovering at USD 30 a barrel now, the government seems to be willing to earn more revenue in this way.

DCAP is not yet ready; the proposals for SCAs and the RCS are yet to be implemented.

So, the exemption clause for the SCAs under the RCS in the proposed excise duty hike of ATF does not make sense. Effectively, the increase will be applicable to all airlines using ATF operating from all airports. In short, all domestic flights, all air fares will be affected.

Earlier this month, oil companies had slashed ATF by a steep 12 per cent. Then, IOC, on the Budget day on February 29, had raised ATF prices in Delhi by Rs 4,174.49/kl to Rs 39,301.31/kl.

The real effect of excise duty hike on ATF will be worse because state sales tax is calculated over and above excise duty. The impact of it will be cumulative.  This is not very encouraging. State-level sales taxes vary between 4% and 30%. Currently, ATF prices vary from state to state depending on the Value Added Tax levied by them. It is also germane to note that the proposed subsidy to enhance the air connectivity will be offered only to those states that reduce value added tax on ATF to one per cent or less.

ATF in India is the costliest

Airlines have been lobbying for sales tax rationalisation for the past several years. ATF prices in India are already 60-70% costlier than global ATF prices. Even Ajay Singh of Spicejet presented this to the government before the Budget. But the government chose to boost its revenue prospects in this way. This will, in any case, have only incremental negative impact. Besides the excise duty hike, the finance minister has also increased service tax through the introduction of a new 0.5% Krishi Kalyan cess that will also add to airfares.

ATF accounts for more than 40% of an airline's total operating expenses. Experts say that the proposed increase in excise duty on ATF will make the raw material costlier by around 4-5% and so the overall cost for airlines may go up by four-five per cent. Hence, the airfares are likely to go up. However, this may not have a major impact on airlines’ profits as oil prices are down, passengers numbers in India keep increasing and so the airlines have the scope to pass it on to the hapless passenger. This is a time when air traffic in India has witnessed a big growth of over 20 per cent last year with domestic airlines carrying 81.2 million passengers. The airlines have benefited from cheaper aviation fuel, offered tickets at lower prices and attracted a lot of willing passengers. Airfares in 2015 were 15-20 per cent lower than the previous year. However, airlines will face more heat when oil prices begin to rise.

In a nutshell, costly ATF will result in increase in airfares and costly airfares will curb air passenger growth. It will go against the government's stated objective to make flying affordable for the masses.

Simultaneously, to give a boost to ‘Make in India’ programme, finance minister Arun Jaitley accepted a long pending demand by the industry to rationalise taxation on

maintenance, repairs and overhaul (MRO). With the number of aircraft in the Asia-Pacific fleet set to nearly triple by 2032, demand for MRO work is growing, and will continue to grow. The MRO industry in India is estimated to be worth $700 million. Jaitley announced sops include zero service tax on MRO, services, simplification of import processes for aircraft spares, exemption on customs duty for maintenance tools and tool kit and removal of the one year window restriction period for using duty free parts. Civil Aviation Minister Ashok Gajapathy had earlier said that the finance ministry has been sympathetic to the demand for tax relief to the MRO industry. The earlier tax regime meant that Indian MROs were 20-30% costlier than those abroad, leading even airlines here to repair their aircraft in foreign countries, including Sri Lanka and Singapore. “Reforms in MRO procedure, duty free period and free stay period are welcome but bigger relief in terms of zero rating of service tax and infrastructure status have been left out,” Amber Dubey, partner and head- aerospace and defence at global consultancy KPMG said.

The government is also keen to improve regional connectivity. Plans to build no-frills, low cost airports have already been envisaged in the DCAP. Finance minister Arun Jaitley allocated a sum of Rs 500 -1000 million to revive 160 non-functional airports and 10 of 25

defunct airstrips across the country. This will be developed in partnership with the state government. While the proposed move is expected to put 50 airports in operational mode in the first two years, the basic question is, given the political equations between Centre and the States; will the states be able to deliver as expected? This is exemplified by the failed instance of Andal in West Bengal. There could be many more such examples.

"Concessions cannot boost air traffic". "Sops cannot stimulate air traffic". 

Several aviation analysts endorse such views.

The government’s stated objective has been, “Make flying affordable for the masses.” To encourage the airlines to operate under RCS, the government attempts a number of things. It appends a needless clause to exempt from increased excise duty on ATF, removes service tax on tickets, and exempts travelers from paying passenger services fee, to enable short-haul air travel of a flying time of less than an hour at a fixed price of Rs 2,500. Though the intent is noble, the step is in the wrong direction. It is a typical example of government intervention in the market that should be resisted at all costs.

If it is found that the new RCS is operationally nonviable due to insufficient passenger numbers, if it is found that increased air fares are discouraging people to fly, then the various concessions being extended by the government in the form of tax rebates, incentives and other subsidies will become redundant, good for nothing.  It is a common business sense that airlines choose the flight sectors to operate on the basis of the sheer traffic potential and the need of the passenger. Irrespective of the price of the moment, the air ticket does get sold which indicates the intensity of importance a flier attaches to its need.

Without doubt, ATF is everything for aviation, the biggest cost in airline operations. The whole of aviation sector can survive without those so-called sops and concessions. But, it will be choked to death without ATF. The benefits of all those sops announced in Budget 2016 have been negated by a hike in excise duty on ATF which will eventually increase airfares and dishearten fliers. Aviation stocks are already reeling under pressure due to such excise duty imposition. Aviation stocks like InterGlobe Aviation, Jet Airways and SpiceJet fell 4-6 percent intra day on Budget day. Investors are scared. A hike in excise duty for ATF prices dampens market sentiments. Budget 2016, is aptly viewed as a Blunder.

In all fairness, the government should go ahead to rationalise the excise duty on ATF (across the board) for all domestic sectors, irrespective of the distance involved. There are a number of other ways and means to boost revenue. ATF could have been spared. A bold initiative would have been to reduce the ATF excise duty to 1% from 8%. This would have directly caused air fares to dip further. Passenger numbers would have soared, and the government would have been flooded with revenues while simultaneously fulfilling its chief objective :  “Make flying affordable for the masses.”