Will Budget 2022 give wings to aviation sector?

The Union Budget 2022-23 is right upon us and as an industry that is trying to recoup from the turbulence caused by the pandemic, the aviation sector is pinning its hopes on the Budget that is slated to be presented by Finance Minister, Nirmala Sitharaman, on February 1, 2022. 

The aviation sector witnessed a series of highs and lows in the previous financial year as it was confronted with the second wave of the pandemic right when it started recovering from the impact of the first one and is now enduring the consequences of a third wave that has been triggered by the omicron variant. 

Against this backdrop, the aviation sector is looking forward to the Budget with the hopes of receiving fiscal incentives and concessions to steer the sector on the path of economic revival.

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The last year's Union Budget introduced a slew of reforms, such as the announcement of a tax holiday on capital gains and exemptions on payment of aircraft lease rentals and royalties paid to foreign lessors, to promote a homegrown aircraft leasing and financing industry in India's first International Financial Services Centre established at the GIFT City. 

This year, the industry is at least expecting the introduction of measures targeted at augmenting the liquidity of airlines and airport operators, such as lowering of taxes on air turbine fuel (ATF) as well as a reduction of 18% minimum alternate tax, and an increase in the threshold of the amount that can be spent by a passenger at duty-free shops. 

Expenditure on ATF accounts for approximately 25-40% of the operational costs of the airlines and, therefore, a reduction or waiver of taxes is not only desirable but also necessary to propel the sector into recovery mode. 

Other measures to augment the liquidity of stakeholders in the aviation sector could include a reconsideration of the goods and services tax (GST) levied on various activities undertaken in the aviation ecosystem, such as the reduction of the GST paid on the purchase of aircraft and aircraft parts, or a waiver of GST required to be paid on re-import of aircraft and aircraft parts repaired or serviced abroad. 

In order to equip the stakeholders with adequate working capital, the government could also consider announcing a reduction in the rate of interest on working capital lines being provided to airlines and airport operators or make necessary adjustments in the Emergency Credit Line Guarantee Scheme to ensure ready availability of working capital without jeopardising the exposures of the lending institutions.  

The last year's Union Budget also featured key announcements pertaining to asset monetisation and privatisation of 6 to 10 airports. 

It is expected that this year's Budget may take forward the asset monetisation initiative and feature announcements pertaining to privatisation of more airports to mobilise the requisite resources to attain the goal set by the Ministry of Civil Aviation of building 100 new airports by 2024. 

In furtherance of the trend of expanding existing airport capacities, it is also expected that more routes will be added to the Regional Connectivity Scheme, a government initiative to boost tourism by improving connectivity with underserved and unserved airports.

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Given the thrust of the government on the creation of an Atmanirbhar Bharat (self-reliant India), the aviation sector is also expecting some announcements that will augment the domestic maintenance, repair and overhaul (MRO) industry. 

Owing to limited capabilities, the MRO business of Indian airline operators is currently outsourced to MRO players outside India. Tax incentives, similar to the ones offered to support the domestic aircraft leasing and financing industry, will certainly attract foreign MRO players to carry out their business in India. 

Last year, the government had introduced a new policy for MRO services that included features such as the allotment of land through open tenders for a period of 30 years (as against the current period of 3-5 years) and the abolishment of the royalty charges required to be paid to the Airports Authority of India. 

According to estimates, the size of the Indian MRO industry is poised to increase from $1.7 billion in 2021 to $4 billion by 2031 and while the measures introduced by the new MRO policy certainly show the intent of the government to create a domestic MRO industry, it is imperative that the lawmakers capitalise on this momentum and use the Budget as an opportunity to introduce the measures required to set India on the path of becoming a global MRO hub. 

The Indian aviation sector is expected to report losses to the tune of Rs 20,000 crores in 2021-22 and will require additional funding of Rs 37,000 crores over the next two fiscal years to fully recover from the impact of the pandemic. 

The Budget is going to determine the pace of recovery for the industry and respite in the form of fiscal incentives will go a long way in providing the much-needed fillip to the aviation sector. 

(Ajay Sahwney, Partner; and Mayank Udhwani, Associate, Cyril Amarchand Mangaldas.)