The Income Tax Department proposes to bring maintenance reserve of airline companies under the tax net. Sources close to the development said the department would soon send notices to companies for taxation of the maintenance reserve which ranged from Rs 200 crore to Rs 500 crore for each airline, depending on the scale of operations.
Finance executives at airlines said that around 25 per cent of the lease rental was earmarked as maintenance reserves. Lease rentals per aircraft are Rs 1.2-1.7 crore a month, depending on the aircraft-make and the agreement between the airlines and the leasing companies.
The Indian aviation industry has a combined fleet of 300 aircraft, around 50 per cent of which are estimated to be leased, while the rest are owned. Taking an average monthly lease rental of Rs 1.5 crore per aircraft, the total amount of maintenance reserves to be under taxes would come to around Rs 750 crore.
An airline has to allocate funds for maintenance reserve, which is meant to take care of maintenance aircraft under lease from overseas players. This amount is over and above lease payments made for the lease of aircrafts.
The department proposes to tax the amount under section 40 (a)(ia) of the I-T Act which disallows the expenses to be deducted from income if the assessee has failed to deduct tax at source while making payments. Sources said an amendment had been made in 2006 that made rent payments and fees for technical and professional services also liable to TDS (tax deducted at source). This means, if a company has not deducted tax while making rent payments or fees for technical or professional services, then the entire expenses, in which these items figure, will be disallowed for deduction from income while computing taxes.
They added this was a very tough amendment since most of the companies showed the amount paid for maintenance of the aircraft as maintenance fees under other expenses. If section 40(a) (ia) is applied, then the entire amount shown under “other expenses” will be disallowed for deduction from income while tax is calculated.
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Sources said that most countries from where the aircraft were leased had entered into double taxation avoidance agreements (DTAA) with India. So, tax on lease payments is not to be deducted in India as per the provisions of DTAAs and this procedure is followed after the Central Board of Direct Taxes (CBDT) issued a clarification.
The local airline also pays for the maintenance of the aircraft to the overseas company which is not covered under lease payments. Sources said this item was out of the tax ambit even if it was a payment by an Indian company to an overseas entity. Neither the item is covered under exempted category, as is the case with the lease payments in DTAAs, nor the companies, which are availing of the exemption, have received any clarification from CBDT.
While most airline executives were unwilling to comment without receiving a formal notiofication , some of them said that since maintenance reserves were part of the lease rental, it was exempted from tax. “There are special purpose vehicles (SPV) with leasing companies that are located in tax-free regions. So, even if the exemption is withdrawn, we are protected because of the tax avoidance treaties with some countries,” said an executive of a low-cost airline.
For instance, Jet Airways had set up an SPV with Washington Aircraft Hire Company and North American Aircraft Hire Company both located in Cayman Islands. SpiceJet has agreements with companies like Babcock & Brown and GECAS. Their SPVs are set up in Ireland.
Taxation of the maintenance reserves of Kingfisher would present another complication since the company has replaced cash maintenance reserves with letter of credit maintenance reserves according to a presentation made by company chairman Vijay Mallya to investors in the beginning of the year. This means that there is a credit period for the reserves instead of paying it directly in cash.
“This is just a procedural change. And, like in all cases under TDS, the airline is paying the tax on behalf of the lessor. So, the tax would be deducted from the amount the lessor gets instead of the airline having to pay an extra amount. So the impact would be on the lessor and not the airline if the taxation is implemented,” said Mahantesh Sabarad, of Mumbai-based brokerage firm Centrum.