The finance ministry has rejected a request from civil aviation ministry and airlines for tax exemption on interest payments made to service external commercial borrowings (ECB). The civil aviation ministry had argued for the exemption as it would reduce acquisition costs of 111 aircraft being purchased by public sector carriers, Air India and Indian. Private airline companies too have asked for similar concessions. With the country expected to buy over 480 planes at a cost of Rs 1,35,000 crore in five years, the exemption was expected to lower the aircraft acquisition costs for airlines significantly.

Tax exemption on interest payments on ECBs was available till June 2001 under Section 10(15) (iv)(c) of the Income-Tax Act, 1961. The aviation ministry and airline companies had argued that the withdrawal of this exemption has made cost of aircraft acquisition expensive.

Airlines as well as the civil aviation ministry had demanded restoration of the tax exemption but the finance ministry has rejected the plea, government sources said. North Block has also said no to postponement of withholding tax on aircraft lease rentals. In the case of mergers & acquisitions, the finance ministry is willing to provide relief to the proposed merger of Air India with Indian but the facility will not be available to other companies.

The finance ministry has said that there is no justification for the government to subsidise foreign borrowings as it leads to countrys indebtedness, the source said. The ministry has argued that the withdrawal of this exemption was recommended by the Shome Committee.

The finance ministry has further suggested that such concessions should be provided only through double taxation avoidance treaties (DTAAs) on reciprocal basis. The ministry has said that there is no rationale for reinstating Section 10(15)(iv)(c) to provide tax exemption on ECBs.

The finance ministry is also likely to withdraw the exemption on withholding tax for lease rentals of aircraft, they said. The levy was kept in abeyance to allow Indian and Air India to expand their fleets through leased aircraft. The finance ministry has now indicated the exemption may be scrapped, which may lead to rise in air fares as the airline firms are expected to pass on the increased costs to customers.