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FDI in aviation capped at 49% — Buying of aircraft to attract tax

Our Bureau

New Delhi , July 8

THE Union Budget, while approving the February 2003 decision of the Group of Ministers to raise the foreign direct investment cap from 40 per cent to 49 per cent in the domestic civil aviation sector, has not given its nod for foreign airlines to acquire a stake in domestic airlines.

The Budget, presented by the Finance Minister, Mr P. Chidambaram, proposes a slew of measures for the civil aviation sector, which may prove beneficial to some and adversely affect the fortunes of others.

Welcoming the decision of raising the FDI ceiling in the domestic aviation sector, the Managing Director, Air Deccan, Captain G.R Gopinath, said that it was a step in the right direction. Similarly, the Chairman and CEO, Kuoni Travel Group, Mr Ranjit Malkani, also welcomed the move.

Interestingly, the high-powered Naresh Chandra Committee, set up to draw up a roadmap for the civil aviation sector, has also proposed a hike in the FDI limit in domestic aviation.

However, the Budget proposal of doing away with, from September 1 this year, tax exemptions which are available to an Indian company to acquire an aircraft or aircraft engine on lease from a foreign state or a foreign enterprise could affect the finances of almost all the airlines.

The financial impact of the decision to do away with tax exemption on leasing an aircraft is likely to vary depending on how many aircraft are leased or owned by the airline. While the move is likely to hit Air Deccan — which only operates a fleet of leased aircraft and plans to acquire more aircraft shortly through this route — very hard, the impact of the decision might not be that severe on other airlines which have a combination of leased and owned aircraft in their fleet.

Unlike Air Deccan, Jet Airways has a fleet of 41 aircraft of which 24 are owned by it. Sources in AI, which apart from leasing Boeing 737-800 aircraft to start its low-cost airline is also planning to lease large aircraft like Boeing 747 and Airbus A-310, said that the decision could put an additional burden of up to $ 250,000 per month per aircraft leased.

The move could also affect Indian Airlines, which has already announced that it plans to lease six Airbus A-320 aircraft and another 11 Airbus A-319 aircraft in a phased manner. Sources in Jet Airways termed the decision to put a tax on lease of aircraft as an "unfortunate step." Similarly, the decision to include airport services in the service tax net could also affect the finances of airlines.

Tax part on acquisition confuses: The Ministry of Civil Aviation is to seek clarification from the Ministry of Finance on the issue of payments made by Indian companies to acquire aircraft or aircraft engine on lease from foreign states or foreign enterprise.

The Minister for Civil Aviation, Mr Praful Patel, said that the Ministry was examining the matter and was likely to take it up with the Ministry of Finance at the earliest.

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