India’s airlines may be forced to rework business plans after the government withdrew a long-standing tax exemption on aircraft lease payments, which threatens to dramatically increase their operating costs.

The new tax regime took effect from the beginning of October and has the potential to add 20-48% to the cost of leasing aircraft and engines. The precise amount will vary on a number of factors, and the taxes do not apply to deals that were approved by the government before the end of September.

There are also ways around it, depending on whether India has double-tax agreements with the state from which a leasing company operates. Airlines have nevertheless been lobbying for the government to drop the tax, saying it could push up costs and prevent them expanding. The local market has been booming recently as the government has supported the launch of new airlines and called for existing airlines to expand.

Finance minister P Chidambaram announced in his 2004-5 budget speech that airlines, which had long been exempt from paying hefty withholding taxes on leases of aircraft and engines, would be forced to pay them from September 2004.

Chidambaram said in announcing the plan that the long standing exemption from the withholding taxes “have outlived their utility”.

As a result of opposition, which came from some of his government colleagues as well as airlines, Chidambaram extended the exemption until the end of March 2005. In presenting his 2005-6 budget earlier this year he extended it to the end of September, but insisted it would be the final time.

State-owned Air India and Indian Airlines have been lobbying hard for the tax to be permanently removed as they have traditionally relied heavily on leasing to expand their fleets.

Established private carriers have also been rapidly expanding their fleets, largely with leased aircraft, while many of the new privately owned airlines that are now being established have based their business plans around using leased aircraft in their launches.

Source: Airline Business