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Indian airlines to pass on new burden to passengers

P.R. Sanjai,  Feb 28, 2010

Mumbai - Air travel is likely to become more expensive as domestic carriers deal with the double blow of an expanded service tax regime and a levy on crude imports from 1 April.

Finance minister Pranab Mukherjee’s Budget for 2010-11 has proposed a 5% customs duty on crude petroleum, up from zero until now. This will make aviation turbine fuel, which accounts for almost 40% of an airline’s operating costs, pricier.

Service tax on air travel is also being expanded to include domestic travel, and international flights in any class; it was earlier applicable only to international first and business class travel.

Airlines, which had been hoping for lower sales tax on ATF across states and special concession for midsize planes in the Budget, will now pass on these new expenses to the travellers.

“This is an inclusive Budget with special focus on infrastructure...but as far as aviation is concerned, there has been no major announcement in terms of concessions,” said M. Thiagarajan, managing director at Paramount Airways Ltd.

The levy on crude imports and service tax on domestic travel “will only increase the air fares”, he said.

Aloke Bajpai, chief executive of travel website, said there was little for airlines to rejoice about.

“It means higher fares and more difficulty for airlines to maintain good load factors,” he said.

Federation of Indian Airlines, or FIA, a lobbying group, had urged the finance ministry to lower the prices of ATF, as member airlines had incurred a combined loss of $2 billion (Rs9,240 crore today) in fiscal 2009, and are expected to post similar losses for the current fiscal.

The increase in operating costs will reduce margins. Increase in fuel prices could also affect airlines’ growth plans.

“It also means capacity addition will need to be cautious, especially since oil is hovering above $80 a barrel, too,” Bajpai said.

But some experts said the industry need not worry too much. The Budget, through a rationalization of income-tax slabs, has also enhanced disposable incomes, and this can only augur well for the carriers.

“This (expansion of service tax) will not have much of an impact as service tax is on the basic fare and not on the additional surcharges,” said Peter Kerkar, executive director, Cox and Kings (India) Ltd, a leading travel house in India.

Kerkar pointed out that on average the basic fare is only around 40% of the total and that the tax on that part “is not very significant”.

“Increased disposable income would benefit the travel industry as people’s propensity to spend would go up,” he added.


Indian airlines to pass on new burden to passengers

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