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HomeNewsHIGH TAXES MAKES INDIAN AVIATION UNCOMPETITIVE : FICCI - KPMG REPORT

HIGH TAXES MAKES INDIAN AVIATION UNCOMPETITIVE : FICCI – KPMG REPORT

India has the potential to become the third largest aviation market by 2020 and the largest by 2030. There is large untapped potential for growth due to the fact that access to aviation is still a dream for nearly 99.5 per cent of its population, indicates the FICCI-KPMG ‘India Aviation 2014-Enhancing Air Connectivity’ report launched today at the civil aviation exposition in Hyderabad.

According to the report, the Indian civil aviation industry is on a high growth trajectory, albeit with minor hiccups. The industry has ushered in a new wave of expansion driven by Low Cost Carriers (LCC), modern airports, Foreign Direct Investments (FDI) in domestic airlines, cutting edge Information Technology (IT) interventions and a growing emphasis on No-Frills Airports (NFA) and regional connectivity.

The Indian civil aviation industry is amongst the top 10 in the world with a size of around USD 16 billion.  This is a fraction of what it can actually achieve. 

“In view of the enormous growth prospects of air traffic and substantial investment projections, Indian aviation market offers significant long term opportunities for global aviation players. Indian Government and industry are already working together closely. I am confident, this partnership will be further strengthened and play a critical role in improving regional connectivity and promoting sustainable development of the civil aviation sector in the country,” says Sidharth Birla, President of FICCI,

The report notes that the next generation of aviation growth in India will be triggered by regional airports. At present, there are around 450 used/un-used/abandoned airports and airstrips spread all over the country. Many Indian states, especially in Eastern India, have started taking pro-active measures to promote air connectivity.  These initiatives include reduction in Sales Tax on ATF, development of no-frills airports, promotion of aviation academies and supportive policies for airlines and tourism.  West Bengal deserves a special mention as it is the first large state in the country to declare zero per cent Sales Tax on ATF at its regional airports and 15 per cent Sales Tax on ATF used by additional flights started at its metro airport in Kolkata.

A lot more needs to be done, as several tier 2/3 cities are still unconnected or underserved. These involve relaxation on regulations, revising the security requirements, allowing domestic code sharing, providing free or discounted utilities and connecting infrastructure. The proposed Essential Air Services Fund (EASF) by Ministry of Civil Aviation (MoCA) needs to be set up immediately. All this will have a multiplier effect in terms of higher growth of local economic activities, tourism and employment.

“India is blessed with a great geographic location, a large upwardly mobile middle class and immense tourism opportunities. We have just touched the tip of the aviation iceberg. The beauty is that our challenges are primarily related to policies, procedures, regulations and taxes. These are all man-made problems and hence surmountable.  The central government and the eastern states have brought in many reforms in the aviation policy, procedures and taxation. We hope this trend continues”, says Amber Dubey, Partner and India Head of Aerospace and Defense at global consultancy KPMG.

The report highlights the significant growth in the Indian aviation sector over the last decade. As per data from the Airports Authority of India (AAI), passenger throughput grew to 159 million (FY 13) and cargo throughput to 2.19 million MT (FY 13), registering an impressive growth of 13 per cent and 10 per cent CAGR respectively over the period FY 2003-2013.  

On the global front, aircrafts transported around 3.1 billion passengers and over 51.6 million tonnes of freight in 2013. The growth in passenger traffic has been led by the strong progress made by Middle East countries and supported by other emerging economies of Latin America, Africa and Asia-Pacific. However, developed economies of North America and Europe lagged behind in terms of growth in passenger traffic. The Asia Pacific region promises to emerge as the largest aviation market by 2032.

The most significant development in the Indian domestic market is the growing dominance of the low-cost carrier model, which in FY 2013 accounted for almost 70 percent of the domestic capacity. LCCs have driven the growth in aviation and tourism through low fares, introduction of regional routes and periodic discount offers. Full service carriers plan to shift more seats to their low cost offerings in line with market trends. Indian carriers plan to double their fleet size by 2020 to around 800 aircraft.

The FICCI-KPMG ‘India Aviation 2014’ report points out that development of air transportation services and socio-economic development are highly correlated. According to the International Civil Aviation Organisation (ICAO), an additional dollar invested in air transport leads to a benefit of around three dollars to the local economy. Moreover, every additional job created in the air transport results in creation of over six new jobs.

The growth in Indian aviation has created significant employment opportunities. With passengers and aircraft fleet likely to double by 2020, the need to strengthen the human resource development infrastructure is immediate. As per KPMG estimates, the total manpower requirement of airlines is estimated to rise from 62,000 in FY-2011 to 117,000 by FY-2017.  It is estimated that the sector, overall, will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labour could create safety issues and may see staff salaries rise, hurting India’s cost competitiveness.

It is a well known fact that the Indian aviation industry is overtaxed and this is being reflected in the industry’s lack of competitiveness at the global level. It is important for India to acknowledge the devastating impact of high taxes. Some of the avoidable taxes/charges that need immediate attention are central and state taxes on ATF and MRO, Service Tax on air tickets, high airport charges etc.

India’s current MRO market size is estimated to be around USD 700 million. By 2020, the total Indian fleet would double in number, making it critical to have a strong domestic MRO industry. According to industry sources, merely 5-10% of the MRO work for domestic scheduled carriers is carried out in India, while most of the maintenance activities are outsourced to third-party service providers outside the country. This is a classic case of scoring self-goals. An inter-ministerial task force on MRO needs to be formed immediately by the government to check the outflow of MRO revenue, foreign exchange and jobs.

Overall, in order to become a top aviation market, all round improvements are required – in airports, air navigation, cargo, MRO, general aviation and human resource development. India would need to broaden the base of domestic flyers. No-frills airports in Tier 2/3 cities need to be developed and the proposed EASF needs to be activated to address financing challenges. Government policies, procedures and regulatory framework need to be futuristic, pro-active and aligned to stakeholder expectations.

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