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Aviation sector needs sound regulation and competition, not freedom from taxes
June, 06th 2012

The aviation ministry has, in a recent consultation paper, proposed scrapping service tax on air tickets and lowering jet fuel taxes to revive bleeding carriers.

Scrapping taxes is not a sensible idea but moderating them when possible is entirely in order. Sparing one sector from service tax could trigger similar demands from other sectors.

More to the point, such exemptions go against the grain of indirect tax reforms and also the proposed goods and services tax ( GST) that seeks to bring all services under the tax net. However, the aviation ministry has argued that an exemption on air tickets would make air travel cheap by 10% and provide relief to customers.

It is not clear, either, that not paying tax on the value they create would particularly help airlines that do pay taxes on inputs. How would they claim credit for the taxes they have paid? The ministry's proposal is shortsighted.

A better way to make air travel cheaper is to cut high taxes on jet fuel. The case to lower taxes is pressing, given the surge in jet fuel consumption on the back of the 15% yearly growth in domestic aviation. India is forecast to become the third-largest aviation market by 2020.

States such as Gujarat and, more recently, Punjab have cut jet fuel tax rates to 4%. There is no reason why Maharashtra and Delhi, that host the largest air traffic, should hold back, as volume gains will occur.

Else, the Centre can also step in and classify jet fuel as a declared good that attracts a uniform sales tax of 4% to ensure that the sector does not suffer.

It would lead to an estimated 6% drop in airfares, boost traffic, offset revenue loss to states and improve the competitiveness of India's airlines.

Mandating infrastructure-sharing for parallel imports of jet fuel by airlines would bring fuel costs down further. Today, all domestic carriers make losses, save IndiGo.

Their combined operational losses were Rs 10,000 crore in 2011-12. Anxiety over mounting airline losses is not misplaced.

But the answer is to strive towards a genuine lowcost environment and leave the rest to the market. The efficient will acquire the failures. New players would enter. Some would disappear. That is all right.

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