Tax Burden on Business Aviation

Despite the fact that the Indian civil aviation market is said to be one of the fastest growing in the world, the business aviation segment of the industry has been constantly plagued with impediments and adversities. To a large extent, these infirmities are attributable to the policies formulated and implements over the years by the Government of India. Some of these policies do not facilitate the creation of an environment that is business friendly. In fact, some of the policies are blatantly hostile to the interests of the business aviation segment of the Indian civil aviation industry thereby stunting its growth. One policy regime that would fall in this category is the one related to the tax structure imposed on the business aviation segment of the industry particularly if the business jets are privately owned. Business aviation has always been and continues to be regarded as an exclusive privilege to be enjoyed by the elite who can afford to pay higher levels of tax. However, times have changed and today, business aviation has become an effective tool in the hands of the business executives for the enhancement of business prospects for the enterprise that owns and operates the business jets for their executives to travel with high levels of efficiency not only within the country, but all across the world.

INFRASTRUCTURE – A BANE FOR BUSINESS AVIATION

Apart from the tax structure, the business aviation segment of the Indian civil aviation industry has for a long time, been plagued by the lack of proper infrastructure dedicated to business aviation. There are hardly any airfields dedicated to business and general aviation as a result of which business aviation aircraft have to perforce operate through the major airfields especially the metro airports where their clientele in concentrated. Unfortunately, owing to the rapid and massive increase in the operations by the Indian airline industry and the ensuing traffic congestion both in the air and on the ground at the major airports, business aviation aircraft find it not only difficult, but quite impossible to find slots for overnight parking. Even if a slot is available temporarily, business aviation aircraft are permitted to park only for a limited period of time beyond which stiff financial penalties are imposed. Consequently, business aircraft are compelled to move to and operate from smaller or satellite airfields. For operating flights, the business jets need to transit through the major airfield to pick up their passengers. This significantly serves to enhance their the cost of operations.

TAX ON PRIVATELY OWNED AIRCRAFT

While lack of infrastructure is certainly a bane for business aviation, the bigger problem that confronts this segment of the industry today is that of high taxes levied on them, especially on the privately owned business jets. This indeed is stifling growth in this sector. As business aircraft began to be more of a problem than a useful facility to improve the efficiency of the corporate world, in the year 2015, there were indications that business jets had begun to lose their importance. This was reflected in the fact that in that year, the business aircraft fleet in India reduced by two per cent, for the first time in two and a half decades. At that time it appeared that the fleet of business aircraft would shrink further as a significant number of business jets were put up for sale. Also, several of the leading business houses in the country such as the Tata Group, GMR, GVK and Jindal Steel & Power as well as some others, deferred their orders for new business jets indefinitely or even dropped their plans completely for expanding their fleet of business jets. Some of the companies even disposed of their newly acquired business jets in the secondary market soon after taking delivery.

Until the year 2008, the fleet of private jets in India had grown steadily at a respectable double-digit growth rate; but thereafter, there was a marked slowdown that was attributed to global financial crisis. As per Rohit Kapur, President, Business Aircraft Operators Association (BAOA), despite the fact that the business aviation segment has an enormous potential in this country, it has witnessed difficult times. After 2008 and up to 2013, the business aviation sector had seen zero growth and in fact even negative growth. Fortunately, in recent times, growth rate has picked up though it is slow and is maintaining a single-digit growth rate.

The problem for business aviation got compounded as in 2007, the government introduced an import duty of 21 per cent on privately owned business jets. However, for business jets imported for charter operations under a non-scheduled operators permit (NSOP), strangely, the import duty was just two per cent. The led a number of affluent individuals or corporate houses to acquire business jet under NSOP, but for private use. This was done to evade the high import duty on private ownership and was in fact against the rules. Thus to avoid paying a high level of tax, a business tycoon desirous of owning a business jet for personal use, finds it a very attractive proposition to set up a company as NSOP, but in fact does not operate any non scheduled service. As just one or may be two business jets are adequate to meet his personal travel requirements, he does not induct any more aircraft. This leads to the establishment of a large number of small companies established under NSOP to operate business jets. Financially, this is not a viable commercial proposition on account of poor economy of scale.

GOODS AND SERVICES TAX (GST)

Introduction of GST in July 2017 has added an additional burden on the business aviation segment. Integrated Goods and Services Tax (IGST) is a combine of both central and state taxes and can also be referred to as GST. While for the import of a business jet for operating under NSOP, the GST applicable is five per cent, an aircraft in this category imported for personal use attracts GST of 28 per cent with no input tax credit. With some other miscellaneous taxes added on, the total tax burden on import of a business jet for personal use works out to 34.5 per cent. When compared with the tax burdens on business jets in other countries which is generally under ten percent, the taxation policy of the Government of India applicable to privately owned business jets appears unreasonable and even defies any logic. But more importantly, it is a major impediment to the growth of this segment of the Indian civil aviation industry.

With some other miscellaneous taxes added on, the total tax burden on import of a business jet for personal use works out to 34.5 per cent. When compared with the tax burdens on business jets in other countries which is generally under ten percent, the taxation policy of the Government of India applicable to privately owned business jets appears unreasonable and even defies any logic.

Apart from the high tax on import of a business jet for personal use, for obtaining Maintenance, Repair and Overhaul (MRO) services within the country, the GST burden on a private jet is 18 per cent. This also applies to spare parts for the business jet imported from the original equipment manufacturer directly or through another agency. However, if MRO services for a privately owned jet is availed of outside the country, there is no liability on the owner for GST. Such a provision would make it attractive for owners of business jets in the private category to avail of MRO services from the outside the country in places such as Singapore, the Middle East of even Sri Lanka. Not only the owners of private jets have to bear the brunt of high taxes, even the GST on rental services of aircraft has been fixed at 18 per cent resulting in higher financial burden on end users.

AVIATION TURBINE FUEL (ATF)

On October 29 this year, Minister of State for Civil Aviation, Jayant Sinha, urged Arun Jaitley, Minister of Finance, to bring ATF under the ambit of GST framework. It is indeed somewhat strange that all types of petroleum products, electricity and alcohol, the three most widely consumed items in daily life, have been kept out of the regime of GST since July last year when this new policy on taxation was formulated and promulgated. Apart from the Ministry of Civil Aviation, the Petroleum Ministry too has asked the Ministry of Finance as well as all the state governments to consider bringing ATF under the framework of GST. Currently, the tax component on ATF is high and varies from state to state. Bringing it under GST would ease the financial burden considerably for the Indian civil aviation industry as a whole as ATF constitutes 40 per cent of the operating cost of aircraft.

THE WAY AHEAD

If the Indian civil aviation industry must to grow to be globally competitive, problems afflicting each of the segments of the industry needs to be addressed by the Government. In order to accelerate the growth of business aviation, there is the need on the part of the government to give it the same importance as is accorded to the airline industry. But perhaps the most important and urgently required step would be to review and rationalise the tax structure across the board with the aim of lowering the burden of taxes. With this, the business aviation segment can hope for better financial viability.

The author is Air Marshal (Retd), IAF