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India Tackles Aviation Taxes

by Mary Swire,, Hong Kong

07 December 2011

The high level of tax on jet fuel has once again come to the top of the political agenda in India as the country's aviation industry battles against increasing operating costs and rising losses.

Despite strong growth in the aviation industry this year, the country's three listed airline companies have all reported losses, and airline bosses have blamed the high cost of aviation fuel, which is said to account for about 40% of airlines' operating costs, for forcing them into the red.

Following a recent meeting with senior representatives from India's airlines, Prime Minister Manmohan Singh has directed the aviation ministry to produce a monthly action report identifying potential reforms which could help the aviation industry, particularly in the areas of taxation, regulation, and airline investment and ownership laws.

With regard to tax, however, the situation is not helped by India's complex system of local sales taxation, with the state governments having been accused by the industry and the central government of charging excessively high rates of sales tax on the transportation of aviation fuel between states. The aviation ministry is, therefore, in turn attempting to convince state government leaders to reduce fuel sales taxes.

Last December, Vijay Mallya, chairman and chief executive of Kingfisher Airlines, welcomed proposals by the finance ministry to bring all aviation turbine fuel (ATF) under the 'declared goods' category for tax purposes, thereby attracting a uniform sales tax of 4% across the country, although efforts to simplify the system appear to have stalled.

The Indian government has long attracted criticism for allowing the tax burden on the aviation industry to grow in recent years, and in September last year, the International Air Transport Association (IATA) said that lowering operating costs for airlines in India was "critical" if the country's industry was to remain competitive.

IATA says that India's Ministry of Finance added USD236m to the cost of operating in India with its decision to extend the 10.3% service tax from international premium tickets to economy and domestic travel, in contravention of International Civil Aviation Organization (ICAO) rules.

“It is an embarrassing situation for such a relevant country as India — which is a member of the ICAO Council — to be ignoring rules that it has helped to develop,” said Giovanni Bisignani, IATA’s then Director General and CEO.

TAGS: tax | business | sales tax | India | law | aviation | tariffs | regulation

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