The domestic airline industry may be in for a heavy blow of Rs 650 crore next fiscal if early indications on tax proposals are anything to go by. The finance ministry is toying with the idea of withdrawing the exemption on withholding tax for lease rentals of aircraft. This would translate into higher airline tariffs for fliers as aviation companies are likely to pass on the tax burden to passengers.

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. It is likely to be withdrawn from April 1 on aircraft as well as engine lease. Over two-thirds of the domestic carriers current fleet of 240 aircraft are on short- and long-term lease while the remaining one-third are owned by the airlines.

The non-availability of the exemption will significantly increase domestic carriers fleet-acquisition costs, according to Federation of Indian Airlines (FIA) chairman and Air India CMD V Thulasidas.

However, the finance ministry, which is looking at axing exemptions to expand the tax base, is not in favour of extending the benefits available to airlines, an official said.

In 2006, the Central Board of Direct Taxes had put out a list of tax exemptions on its Website to get public views on which ones should be withdrawn. It is likely that the government would first touch the exemptions available to corporate sector rather than those available to individuals.

Withholding tax rates vary between 10% and 48%, depending on the country the lessor is registered with. The domestic carriers have various expansion plans lined up with airline companies likely to add over 450 aircraft to their existing fleets. The plans may become more costly after the exemption on withholding tax under Section 10(15A) of the Income-Tax Act is withdrawn. The exemption is valid to lease deals signed till March 31, 2007. To hedge themselves against this, some of the airliners are looking at finalising their lease agreement before March 31, 2007.

While the tax levy may not lead to a cut in expansion plans of the airlines companies, they may pass some of the additional cost on to passengers. If the exemption is withdrawn, it would lead to increase in costs by at least Rs 60 per seat, assuming an average withholding tax of 10%, explained the director of a leading low-cost carrier.

Explaining the tax calculations, CEO of a low-cost carrier said, The average monthly lease rent of an Airbus A320-type aircraft is about 1% of the price value, which turns out to be $400,000 per month per plane. Assuming an average 20% withholding tax, it would result in yearly tax of $960,000 per plane.

A ballpark estimate for 150 aircraft leased by domestic carriers, at 20% tax, would result in total tax of over Rs 650 crore in a year. This is expected to significantly affect costs and profits of the aviation industry, which is likely to incur losses of Rs 2,000 crore this fiscal.