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    Default Budget 2012: Airfares likely to rise, says KPMG

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    Airfares are likely to rise as increase in service tax will make overheads like advertising, utilities and rents of aviation companies costlier, according to KPMG .

    "Increase in service tax will make overheads like advertising, utilities and rents of aviation companies costlier. This will also increase ticket fares. The exact impact will need to be worked out," KPMG director for aviation Amber Dubey said.

    He said though 49 per cent FDI by foreign airlines being under active consideration is good news, the industry expected this to be announced as an accepted policy. Referring to the basic customs duty exemption allowed on aircraft spare parts, he said it was a welcome move.

    "Its a fulfilment of a long-term demand of domestic MRO players. This will help cut down maintenance cost of airlines and help the upcoming MRO industry. The industry was expecting some relief on service tax on MRO as an import substitution measure. Today Indian carriers fly empty aircraft and crew at a high cost to MRO destinations in the Middle East and South East Asia primarily because of this tax anomaly," he said.

    He said allowing ECB limit of USD 1 billion for working capital for airlines is a welcome move.

    "Preliminary estimates are that this may save 150 to 300 basis points for working capital ***** for airlines. Key challenges would be banks reluctance to lend to the sector as well as hedging costs," he said.

    He said that increase in excise will make ATF and domestic spare parts costlier and that the exact impact will need to be worked out. He also said income tax relief for individual taxpayers will put more disposable income in the hands of individuals to travel by air.

    "Some of this may translate into greater spend on travel and tourism, thus benefiting the aviation sector," he said.

 

 

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