By Indraneel Pinnamshetty
In order to stimulate the Regional Connectivity Scheme (RCS), also known as UDAN, the government has decided not to levy GST on the disbursement of Viability Gap Funding extended to selected airlines. This move is seen as part of the series of efforts by the government to make airline carriers more accessible for the majority of the population in the country.
Airline flying in India
For most Indians, airlines are a costly affair. While the metro cities and other major cities enjoy bustling air connectivity, the lower tier cities do not have similar opportunities to connect to different regions via air travel. To reduce such chasms, the government has launched a scheme under the name UDAN to boost regional connectivity with flights covering distances up to 800 km through a market-based mechanism.
To incentivise and make operations viable for commercial airlines, the government offers flexible code-share arrangements, reduced excise on fuel and taxes. Further, the airlines are not charged the landing, parking and terminal landing fees at airports operated by the Airports Authority of India (AAI). The airlines will additionally be given a viability gap funding (VGF) raised from UDAN flights on a quarterly basis, based on Consumer Price Index for Industrial Workers.
GST and UDAN
While many industries were subjected to apprehensions due to the implementation of GST, the aviation sector was fortunate not to experience such fears. The civil aviation industry could breathe a sigh of relief post-GST implementation as they managed to escape the punitive taxes, thanks to heavy lobbying by the industry stakeholders and regulators.
Many luxury items have attracted additional tax with the cumulative rate exceeding 30 percent for a luxury car. However, air tickets have been taxed rather lightly with the applicable tax rate reducing from 6 percent to 5 percent for economy class. As a point to be noted, the tax rate of 5 percent is on the value of a passenger ticket excluding the subsidies provided by the central and state government. This implies that, until lately, subsidies provided by the government were not exempted from GST. This step reflects the government’s efforts to take some of the weight off the shoulder of that airline carriers and to stimulate the burgeoning Indian aviation sector. This comes in as a welcoming move to the industry suppliers as they are provided with both lower GST rates and exemptions in the subsidies.
Caveats for a promising future
UDAN has the potential to script a new story in the aviation history of India with its unprecedented support of the government. However much of the success of the scheme depends upon the implementation and traffic demand.
Regional airline operation, unlike national and international operations, is likely to be having thinner margins. This means that if the government does not pay the subsidies on time, then there is a huge risk in operational inefficiencies. Also, the government has to overcome the roadblocks of entwined red-tapism and corruption to ensure proper implementation of the scheme.
Government subsidies and other support systems will ensure loss-free operation only until the traffic demand is adequate. A failure in the demand side will just make subsidies a lifeline to an otherwise dead operation. Since predicting traffic demand in these routes is a difficult operation, the government and various stakeholders have to develop a greater understanding of the underlying demand and also bypass any hindrances through measures such as initiating induced demand. Needless to say, a successful implementation of the scheme will bring in an array of benefits to travel, hospitality and tourism sectors of the country.
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