End of tax sop may hit aircraft leasing plans

Aircraft leasing will not be that easy a route for airlines anymore since the cost is expected to shoot up by 67 per cent as the withholding tax exemption extended by the Finance Act of 2005 comes to an end on September 30.

"In the absence of the withholding tax exemption, the leasee airline will be required to bear the tax on such lease rental agreement signed after September 30."

"This will result in 67 per cent increase in the leasing cost of airlines, especially for new entrants," an industry source said.

The rise in the cost would adversely affect the economics of leasing and airlines' plans to expand fleet through leasing.

G R Gopinath, managing director of low-cost carrier Air Deccan, said the move would affect new entrants. "The leasing cost will zoom in all lease agreements signed on or after October 1 as the exemption period end on September 30. We expect the government to review the decision."

"However, Air Deccan will not be affected since it has already signed necessary agreements much before," he said.

Though the quantum of the financial impact on airlines would depend on the residential status of the leasor and the provisions of the Double Taxation Avoidance Agreement governing the two countries, the rate of tax could range up to 40 per cent plus applicable surcharge, sources said.

"The leasing cost ranges between 0.75 per cent and 1 per cent of the total cost of aircraft. It primarily depends upon the model of the aircraft. If the aircraft is old, then the leasing cost will be 0.75 per cent of the aircraft cost per month. For new models, it is one per cent per month," they said.

According to sources, Air-India and Indian Airlines are still devising their leasing plans. Withdrawal of the sop would turn the leasing route uneconomical and thereby both the state-owned airlines would not be able to keep their market share in the wake of the mounting capacities of foreign airlines, they said.

"The market share of Indian Airlines has slipped to 29 per cent from 40 per cent. Air-India's share in international routed is only at 20 per cent. Withdrawal of the exemption will render both the airlines disadvantageous," a source said.

"Air-India has not still finalised the leasing arrangements to meet the Haj flights due to the withdrawal of tax exemption," the source said.

Air-India has 22 aircraft on lease as the acquisition programme has been delayed. Moreover, it has put in place a plan to take more aircraft on lease to meet its capacity requirements up to the winter of 2006-07.

Interestingly, Indian Airlines, now having 21 leased aircraft, has prepared a lease blueprint to bridge the capacity requirements before the new planes start arriving after the orders are placed.

The Withholding Tax exemption was earlier introduced in the Finance Act 1989 to facilitate the national carriers to expand their capacity and to acquire aircraft on lease.

The provision was reintroduced in the Finance Act 1999, after a brief withdrawal. State-owned airlines have already appealed to the finance ministry to extend the exemption as the new aircraft, as a part of acquisition programme, would only join after 2006.