Budget gives boost to aviation sector

The Indian airline industry today got a major relief with the government allowing it to raise capital through external borrowings worth USD one billion for a year, as it planned to allocate Rs 4,000 crore (Rs 40 billion) to ailing Air India.

In a bid to encourage the nascent maintenance, repair and overhaul (MRO) sector, it also proposed to allow full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment.

Introducing the 2012-13 budget, Finance Minister Pranab Mukherjee acknowledged that the airline industry was facing a financial crisis and the high operating costs of the sector was "largely attributable" to the jet fuel cost.

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"To reduce the cost of ATF, Government has permitted direct import of ATF by Indian carriers, as actual users."

In order to address the immediate financing concerns of the civil aviation sector suffering from a major capital scarcity, he proposed to permit "External Commercial Borrowings (ECBs) for working capital requirements of the airline industry for a period of one year, subject to a total ceiling of USD one billion."

He also said that a proposal to allow foreign airlines to participate up to 49 per cent equity of an airline company, operating scheduled or non-scheduled services, was "under active consideration of the government."

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While the central plan outlay for Civil Aviation Ministry in 2012-13 is estimated at Rs 7,293 crore (Rs 72.93 billion), a demand for plan allocation of Rs 4,000 crore (Rs 40 billion) to Air India in the next financial year has also been proposed in the budget.

Noting that India had the potential to establish itself as a hub for third-party Maintenance, Repair and Overhaul (MRO) of civilian aircraft, Mukherjee said to realise this potential, spare parts of aircraft, new and retreaded tyres and testing equipment would be fully exempted from basic customs duty and countervailing duty.

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In a sop to Indians travelling abroad, he also proposed to raise the duty-free baggage allowance, which was last revised in 2004, from Rs 25,000 to Rs 35,000 and for children of up to 10 years from Rs 12,000 to Rs 15,000.

In order to augment long-term low cost funds from abroad for the infrastructure sector, the budget also proposed tax incentives for funding certain infrastructure sectors, including those Indian companies involved in aircraft operations.

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It proposed to amend Section 115A of the IT Act to provide that any interest paid by a company to a non-resident entity in respect of borrowing made in foreign currency from sources outside India between July 1, 2012 and July 1, 2015, would be taxable at a rate of only five per cent, down from 20 per cent applicable currently.

The amendment will take effect from April 1, 2013 and apply to the assessment year 2013-14.