How Rational Aviation Regulations Can Boost Tax Revenue and Business Aviation in India
To promote the growth of the aviation sector in any country, especially of the general aviation industry, taxation is the key lever that the Government can pull to provide an impetus. Through 2022, bonus depreciation had been allowed for 100 per cent of the cost of new or used aircraft in USA, under the relevant Internal Revenue Codes. The depreciation benefit provided a huge boost to the business aviation industry and added to the overall economic growth in the USA. We need to pull such similar tax levers in India to grow the business aviation industry in India.
However, when regulations and taxations are related to each other, matters become complex in Indian aviation. In this article, I address how regulations and taxation surrounding the aircraft operated under NSOP and private category aircraft become an impediment to growth of the Indian business aviation industry. Further, I delve into the issue through actual calculations to quantify how easing of regulations could provide the necessary stimulus to business aviation, namely on-demand aviation industry.
First, let’s look at basic regulations. Many companies want to purchase an aircraft for undertaking business travel for their top executives for whom time in their most important factor. However, they can only import and operate aircraft under two categories – NSOP or Private:
TAPPING GROWTH OPPORTUNITIES FOR THE INDIAN BUSINESS AVIATION SECTOR THROUGH TAX POLICY REFORMS WILL HAVE A POSITIVE IMPACT ON THE NATION’S ECONOMY
Let’s look at specific tax rates applied on the acquisition, import and operation of general aviation aircraft. Currently, there is a four-rate Goods and Services Tax (GST) structure of 5 per cent, 12 per cent, 18 per cent, and 28 per cent. Depending on the usage of the aircraft and nature of import, the tax rates are as follows:
AIRCRAFT IMPORTED UNDER NON-SCHEDULED OPERATOR PERMIT (NSOP) HOLDER
|IGST of import on aircraft||:||5% of the cost of aircraft|
|Basic Customs Duty (BCD)||:||2.5% of the cost of aircraft|
|Social Welfare Surcharge (SWS)||:||10% of the BCD|
|Total tax on import of aircraft||:||7.75% on the cost of the aircraft|
WHEREAS AIRCRAFT IMPORTED TO BE OPERATED UNDER PRIVATE CATEGORY ARE SUBJECT TO THE HIGHEST TAX STRUCTURES
|IGST of import on aircraft||:||28% of the cost of aircraft|
|Basic Customs Duty (BCD)||:||3% of the cost of aircraft|
|Social Welfare Surcharge (SWS)||:||10% of the BCD|
|Compensation cess||:||3% of the cost of aircraft|
|Total tax on import of aircraft||:||34.30% on the cost of the aircraft|
|GST on aircraft charter||:||18%|
Hence there is huge difference of 26.55 per cent in tax between those applicable to NSOP operators and those for private operators. This taxation structure incentivises the aircraft buyers to incorporate an NSOP holding company. However, this path is full of hassles. On the other hand, their cost of acquisition increases by 1/3rd. For an aircraft, this could be a substantial amount even for a large company. In addition, the companies cannot charter to offset their fixed costs.
The challenge is that companies have their core competencies in areas such as manufacturing, retail, IT and other sectors. However, just to import and operate one aircraft they have to develop core-competence in managing an aviation company. This goes against the same principles for which they were planning to buy aircraft in the first place, i.e. to save time. Hence the companies that can afford to purchase and operate a business aircraft decide not to go ahead with their purchase decision. Whereas professional NSOP holders, the actual aviation companies, operate in a charter competitive market. They don’t have the balance sheet strength to receive attractive finance terms and hence the cost of finance to acquire airplanes and operate becomes cost prohibitive.
However, if companies are allowed to simply purchase an aircraft for their own business use and provide it to an aircraft management company to operate under NSOP usage, the overall tax received by the Government over the lifecycle of the aircraft would increase.
Let’s look at the following use case:
|• Cost of a mid-size pre-owned aircraft||:||$6,000,000 ($6M)/49 crore|
|• Charter rate per hour||:||2,75,000|
|• Average use by a private company||:||200 hours per year|
|• Average use by a good NSOP company||:||600 hours per year|
|• Additional flying hours under NSOP||:||400 hours per year for charter|
Based on the above, let’s review the estimated Government tax collections from NSOP versus private operators for a typical lifecycle of five years.
USE CASE 1: TAX COLLECTED FROM AIRCRAFT OPERATED UNDER NSOP CATEGORY
One Time Tax During Import:
|IGST on import||:||2.4 crore (5% of 49 crore)|
|BCD on import||:||1.215 crore (2.5% of 49 crore)|
|SWS on BCD||:||12.5 lacs (10% of BCD)|
|Total tax on import||:||3.767 crore (A)|
|Tax on operation:|
|IGST on charter sales||:||18%|
|Total charter revenue/year||:||600 x 2,75,000 = 16,50,00,000*|
|(even owners are charged under NSOP model)|
|IGST on charter sales||:||2.97 crore|
|IGST over 5 years||14.85 crore (B)|
|Total taxes paid by NSOP|
|over 5 years||:||18.62 crore|
USE CASE 2: TAX COLLECTED FROM AIRCRAFT OPERATED UNDER PRIVATE CATEGORY
|IGST on import||:||13.08 crore (28% of 49 crore)|
|BCD on import||:||1.458 crore (3% of 49 crore)|
|SWS on BCD||:||14.58 lacs (10% of BCD)|
|Compensation cess||:||1.458 crore (3% of the 49 crore)|
As the aircraft is operated under private category, no charters can be carried out. Hence IGST on charter revenue is nil
|Total taxes paid by private company over 5 years||:||16.67 crore|
|Excess tax and charges paid by NSOP company over a lifecycle of 5 year||:||approximately 1.95 crore|
From the above example it is clear that over a five-year lifecycle of the aircraft, the tax revenue from the same aircraft is the same for an aircraft acquired and operated under NSOP category versus that acquired and operated under private category.
Further, note that as the aircraft flies more under an NSOP category, there are additional requirements:
However, this impact is just for one aircraft. We can imagine the positive impact on the business aviation industry, when more aircraft are inducted in the country.
On one hand, the Government’s wants to penalise the ‘rich’ companies by taxing them highest for using a business aircraft and on the other hand, the aviation regulations don’t allow the private companies to purchase aircraft and give them to aircraft management companies to operate them under NSOP category. Ironically, as mentioned above, private companies are the ones who can afford to purchase a business aircraft that can be used by them as well as by the market. The potential to stimulate economic activity and ultimately lead to higher tax collections would be greater if the Government realises the benefit that by changing regulations a bit, they can increase not only tax revenues per aircraft, but also encourage more companies to use business aircraft. This change would revolutionise the highly stagnated growth of this industry in a vibrant Indian economy.