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Draft aviation policy: 2% fare levy, Rs 2500 cap on 1-hour flights proposed

Civil Aviation Secretary R N Choubey said, “The mandate from the Prime Minister was to bring out a policy which will make it possible for the masses to fly. That is the message which we set out to work with.”

By: ENS Economic Bureau | New Delhi | Updated: December 25, 2015 10:15:12 pm
SPicejet, Economy airfare, Civil Aviation Secretary R N Choubey said, “The mandate from the Prime Minister was to bring out a policy which will make it possible for the masses to fly. That is the message which we set out to work with.”

The Ministry of Civil Aviation has proposed an upfront subsidy to airlines by levying a two per cent fee on all domestic and international commercial flights in order to bring down the cost of air travel on non-metro routes.

The proposed move, which could result in an increase in flight costs on trunk domestic air routes such as those connecting major metros as well as international routes, is aimed at bringing down the cost of air travel on non-metro routes to about Rs 2,500 per flying hour under a freshly conceived Regional Connectivity Scheme (RCS) that was unveiled in the revised draft civil aviation policy here Friday.

The subsidy will be funded through a two per cent levy on air fares for both domestic flights on trunk routes and on international commercial flights and is expected to generate Rs 1,500 crore per annum.

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Civil Aviation Secretary R N Choubey said, “The mandate from the Prime Minister was to bring out a policy which will make it possible for the masses to fly. That is the message which we set out to work with.”

The policy will be put up for public consultations for a period of three weeks. A draft cabinet note would be framed thereafter and sent for inter-ministerial consultations.

In another significant initiative in the draft policy, the ministry said that it is looking at liberalising the bilateral regime by permitting open skies between India and SAARC nations and countries beyond 5,000 km radius of Delhi.

Post-April 2020, open skies arrangement with countries within 5,000 km radius will be considered along with a proposal to allow FDI in India airlines over the current 49 per cent.

The draft policy proposes to abolish service tax on MRO (maintenance, repair, overhaul) services provided in India and allows increase in tax-free period for storage of spares imported by MROs.

“We aim to make India hub for MRO services in Asia, as we realise the potential this segment offers. We will also try and persuade the states to reduce VAT on MRO activity to nil,” Choubey said.

As per the draft policy, the government will provide viability gap funding (VGF) to airlines flying to underserved and unserved destinations to keep air fares at about Rs 2,500 per flying hour on regional routes.

The VGF will be indexed to aviation turbine fuel (ATF) prices and to inflation. While the Centre would provide 80 per cent of the resources to bridge losses incurred by airlines by flying to these routes, the remaining amount would have to be pitched in by the states. There will be no service tax on tickets on regional flights.

The draft policy also proposes a model to auction bilateral air traffic rights to countries that are at a distance of less than 5,000 km.

“For countries within 5,000 km where domestic airlines have not fully utilised their quota, additional seats above existing rights would be allotted by bidding for a three-year period. The proceeds of the auction will also be used to fund regional flying in the country,” Choubey said.

The proposed subsidies for enhancing air connectivity would, however, be only offered in states which reduce VAT on ATF to one per cent or less at RCS airports.

“States are currently not collecting any tax at RCS airports because there are no flights to these destinations. If they reduce VAT on ATF at these airports, they would be earning to the extent connectivity improves to that location,” Choubey said.

The policy proposes to develop no-frills airports at around 400 unused air strips across the country at estimated cost of around Rs 50 crore each for supporting flights to unconnected destinations. The push for air travel proposed under the regional connectivity scheme is expected to boost domestic air traffic to 300 million by 2022 from 70 million now. Domestic air ticketing is expected to go up further to 500 million by 2027.

The policy did not specify a clear alternate to the 5/20 rule (which requires an Indian airline to have a fleet of 20 aircraft and operational experience of five years to commence international operations) but proposed a reworked domestic flying credits (DFC) formula requiring Indian airlines to earn and maintain 300 DFCs annually to start flights to SAARC nations and countries beyond 5,000 km radius of Delhi, along with options to either retain or abolish the regulation altogether.

A final decision on the issue will be taken after public consultations and will be notified when the final civil aviation policy is cleared by the Cabinet.

To facilitate ‘ease of doing business’, the draft policy has also proposed liberalising the bilateral air traffic rights regime. The draft policy proposes open skies with SAARC nations and countries that are beyond 5,000 km flying distance on a reciprocal basis. For countries within 5,000-km flying distance, bilateral rights will be awarded through negotiations till April 1, 2020, after which open skies will be considered.

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