THE Ministry of Civil Aviation (MCA) has projected tax reforms as the key to reducing air tariffs and bringing air travel within the reach of masses in the latest draft Civil Aviation Policy.

The reform may, however, turn out to be classical example of Government moving back and forth as far as taxing air travels are concerned. The draft policy also carries seeds of potential clash between proposed regulators in the aviation and petroleum sectors.

The policy, which is awaiting Cabinet approval, envisages imposition of a cess on both domestic and international air travel. It was only in January 2004 that the Finance Ministry had abolished foreign travel tax and inland air travel tax to reduce the cost of air travel.

The receipts of the proposed cess would be credited in a non-lapsable account called Essential Air Services Fund (EASF) that would be constituted on the lines of Central Road Fund (CRF). The money from EASF would be used to provide explicit subsidy to essential but uneconomical domestic air services and commercially unviable airports. EASF may also be used to lend soft loans to existing airports to facilitate their modernization and to aid establishment of new airports.

The hapless and harassed air traveler would thus have to share the cost of improvements in airport infrastructure and segments of aviation. Government funds such as EASF are nothing but exploitation of consumers in the name of public interest.

The latest draft policy is largely based on recommendations made by Naresh Chandra Committee on Road Map for Civil Aviation. The committee submitted its report in two parts – first in November 2003 and second in November 2004.

The policy has proposed reduction in excise duty, customs duty, sales tax and other taxes on aviation turbine fuel (ATF) and aviation gasoline (AVGAS). The latter fuel is used only by piston aircraft and has thus limited relevance.

The Government at present levies 8% excise duty and 10% customs duty on ATF. The States levy sales tax on ATF at different rates whose weighted average stands at 22.1%. The policy draft has thus proposed to notify ATF and AVGAS as "declared goods” under the Central Sales Tax (CST) Act to reduce sales tax. It is not clear how MCA would be able to convince Finance Ministry to act on tax reforms as defined in the draft policy.

The Ministry of Civil Aviation has also proposed to introduce "parity in the level of taxation between ATF supplied to foreign carriers and to Indian carriers for international operations.”

A first step in this direction was taken in the budget for 2005-06 which envisaged amendment of CST Act to declare sale of ATF to any designated Indian carrier for its international flight as deemed export. This amendment incorporated in the Finance Act enables designated Indian carriers to purchase ATF for the international flights without payment of sales tax.

The Indian carriers flying abroad are, however, still at disadvantage as compared to foreign airlines that are exempt from all taxes under the Foreign Aircraft (Duties on Fuel and Lubricants) Act 2002. This waiver law was enacted in June 2002 after prolonged discussions within the Government and Parliament over the relevant bill since mid-nineties.

The airlines that operate within the country are the worst affected by taxes and lack of competition in supply of ATF. They are not authorized to hedge the price of ATF on the ground that they do not actually import the fuel. And they practically cannot import because ATF infrastructure at the airports is owned and managed by three oil public sector undertakings (PSUs). These are: Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL).

The trio revises ATF prices every month keeping in view the cost of crude and Arab Persian Gulf Platt ATF prices. The cost of fuel is perhaps the single largest factor in the operational cost of domestic airlines. Jet Airways (India) Limited, for instance, attributed 26.1% of its total expenses to ATF during the six months ended 30 September 2004.

MCA is thus keen usher in competition in the supply of fuel to airlines to reduce the cost of air services. It has proposed that all eligible suppliers of ATF will have equal access to ATF supply system, which are currently owned by public sector oil companies. The beneficiaries of this liberalization would obviously include Reliance Industries Limited and Mangalore Refinery & Petrochemicals Limited.

MCA has proposed that ATF infrastructure would be regulated by the proposed Airport Economic Regulatory Authority (AERA). This proposal, if accepted, would create head-on collusion between AERA and proposed Petroleum and Natural Gas Regulatory Board (PNGRB).

Under PNGRB Bill that is awaiting Cabinet approval, PNGRB would be empowered to decide when and which facility should be notified as common carrier, that is, a competitor should allow other players especially new comers to use its infrastructure such as pipelines to deliver gas and refinery products.

The Ministry of Petroleum Ministry had last year rejected a suggestion to include ATF infrastructure at airports (hydrant systems) in the legal definition of common carrier.

One hopes the Cabinet Secretariat is able to detect this potential source of show-down between AERA and PNGRB and nip the trouble in the bud. There is, however, nothing wrong in the policy's prescription that "airport operators will provide land and other facilities to private suppliers on the same terms and conditions as is being extended to public sector oil companies.”

The draft says: "airport operators will, wherever possible, establish a common hydrant infrastructure with equal access for all ATF suppliers on the basis of user charges. International ATF suppliers will also be encouraged to participate in ATF supply systems after due authorization by the Central Government.”

AERA will fix airport charges including air navigation charges. AERA will also formulate performance standards for airports. The Government intends to keep airport user charges at internationally competitive levels. An initiative in this direction would be opening the door for ground handling services to competition. MCA has proposed induction of independent service providers in the ground handling services arena.

After laying down policy, MCA would turn its attention to restructuring of Airport Authority of India (AAI). The policy has proposed demerger of cargo and ground handling operations, consultancy, architecture and construction wings from AAI into separate subsidiaries.

The Government should tread cautiously on demerger proposal as break-up of companies into holding company with subsidiaries does not per se result in operational improvements as the management is same – babus and netas who manage companies through dummy CEOs.

Moreover, AAI itself is a product of mega merger in the nineties between the two entities that earlier separately managed domestic and international airports. The demerger proposal is another instance of one step forward one step backward.

MCA has also toyed with idea of incorporating "a separate corporate entity under Government ownership” for providing modernized air traffic services. It is nurturing grandiose vision of developing "India as a global aviation hub.”

MCA intends relax regulations for inbound and outbound charter services to give boost to tourism. Government will encourage Indian carriers to join regional and multilateral groups that have similar agenda of liberalization. It will liberalize bilateral air service agreements with other countries on a reciprocal basis over the next five years.

It is good that MCA has belatedly admitted that unutilized bilateral traffic rights have to be used optimally. All these years, the Government was pampering and protecting Air India by denying private airlines to fly abroad or limit Indian Airlines' flights to neighbouring countries.

All scheduled Indian carriers with a minimum of five years' continuous scheduled operations in the domestic sector and possessing a minimum fleet of 20 aircraft will be progressively allowed to operate on international routes.

The policy also provides for strengthening of the qualification norms for domestic scheduled operations by hiking the minimum equity requirement.
The paid-up equity capital of domestic scheduled airliner would be increased to Rs 50 crore from the present 30 crore. This would apply to those companies that operate minimum of five aircraft with take-off mass exceeding 40,000 Kg. For each addition of five aircraft, an additional equity investment of Rs 20 crore would have to be made.

Similarly, the equity norm for airliners that operate five planes with take-off mass below this weight would be doubled to Rs 20 crore. They too would have to finance purchase of each addition of five aircrafts with additional equity of Rs 10 crore.

The policy should actually specify prudent debt-equity norms for airline industry as heavy reliance on borrowings and lease finance can create debt servicing problems for big fish of the industry. Moreover, there is an underlying income tax angle in any debt-equity ratio that has to be kept in mind. One hopes Finance Ministry would make some creative inputs in its comments on the draft policy.