New entrants into the Indian skies will get to the lucrative overseas market relatively more easily and air travellers could look for more — perhaps cheaper — options in flying abroad and improved regional connectivity in the domestic sector. These and various tax sops for investors in India’s underdeveloped maintenance, repair and overhaul (MRO) infrastructure are the highlights of the country’s first comprehensive civil aviation policy likely to be approved by the Cabinet shortly.
Currently, under the so-called 5/20 rule, domestic airlines can fly abroad only when they have acquired a fleet of at least 20 aircraft and have flown in India for five years. However, sources privy to the final draft of the policy — the initial version was put up for public comments more than six months ago — said once the 20-aircraft fleet is ready, these airlines could start flying out of the country, subject to the caveat that one-fifth of the capacity is deployed for domestic operations.
The new policy, which would also give foreign airlines the opportunity to increase their flights out of India thanks to a provision to auction unused traffic rights under bilateral pacts. While domestic airlines, often not able to fully use these rights, are worried that their market share could shrink as a result of the move, the government reckons that a liberal policy would benefit air travellers. Besides, the policy would also permit “open skies” between India and SAARC nations and countries beyond 5,000 km radius of Delhi, doing away with the restrictions on traffic rights.
The policy, analysts say, is likely to bring cheer to passengers from smaller towns as it caps the fare at R2,500 per flying hour, thanks to a viability gap funding. Although the initial proposal was to levy a 2% cess on metro routes to finance the VGF, this, sources said, has been dropped. “We could raise money through auctions of ‘bilaterals’ but a final decision in this regard has not been taken yet,” a top government sources said
The proposal to dilute the 5/20 rule has divided the sector with new airlines like the Tata Sons-promoted AirAsia India and Vistara backing it while the older domestic airlines like IndiGo, SpiceJet, GoAir and Jet Airways opposed it citing unfair advantage to new airlines. Ratan Tata, chairman emeritus of the Tata Group, had chipped in, calling the rule protectionist and monopolistic. “The abolition of the five-year rule would allow newer airlines to join older ones in flying abroad on routes that are more profitable,” Amber Dubey, partner, KPMG told FE.
“The proposed changes in bilateral rights usage would indicate the country’s intention to eventually move to a completely liberalised ‘open sky’ policy. The auctioning method would ensure that there are more seats and options available to the travellers, thus bringing affordability,” Dubey added.
While the policy seeks to encourage airlines to fly to under-served and unserved destinations, it also has a focus on developing no-frills airports at unused airstrips across the country.
Identification of such routes would be subject to state governments’ forgoing value-added tax on aviation fuel. Service tax on tickets on regional flights may be removed.
Industry experts say that these proposals, if implemented, would provide the much-needed affordable connectivity to travellers besides incetivising smaller aircraft fleets.
Further, the policy intends to cut down taxes associated with MRO companies. This would ensure that a significant portion of nearly Rs 5,000 crore annual MRO business attributed to the country is brought to the country. Due to excessive taxation in the country, only 10% of the potential business is currently transacted locally while the rest is outsourced to neighbouring countries. “It will be clarified that MRO, ground handling, cargo and ATF infrastructure co-located at an airport will also get the benefit of ‘infrastructure’ sector, with benefits under Section 80-IA of Income Tax Act,” the draft policy had said. Additionally, there was also a proposal to exempt service tax on MRO output services. However, sources said, the finance ministry has shot down the proposal, saying it would result in disruptions in the Cenvat chain.
“With the incentives proposed in the policy, the MRO sector would become affordable. This will attract not only domestic but international carriers as well, which currently fly empty planes to Dubai, Singapore, Sri Lanka and Malaysia for these services,” Abhay Krishna Agarwal, partner, infrastructure, EY, told FE.
The ease of doing business is also envisaged to be enhanced by allowing airlines to enter into code-share agreement without prior government approval as is the current norms.
A code-share agreement between two airlines allows one airline to sell seats on a flight run by another airline with the airline code and flight number of the marketing airlines. This helps in seamless connectivity for passenger Reggie Nelson Jersey