IATA Highlights Potential Exit of Global Airlines Due to Indian Tax Hurdles

The complexities of India's tax system are creating significant challenges for global airlines operating in the country, potentially driving them away from what is currently the world's third-largest aviation market. This concern was highlighted by the International Air Transport Association (IATA) during its 80th annual general meeting (AGM).

Concerns Raised by IATA

During a roundtable discussion on the sidelines of the AGM, IATA's Director General Willie Walsh emphasized the risks posed by India's intricate tax system, including the possibility of double taxation. Walsh noted that these tax complexities could force international airlines to reconsider their presence in the Indian market.

“Tax issues and India go hand in hand...we are very concerned that some of the proposals would actually lead to airlines withdrawing from the market because (they would be exposed to) the complexity of tax rules, the extent of taxes, and the risk of double taxation, which most air service agreements set out to avoid," Walsh said.

Investigations and Allegations

In October 2023, the Directorate General of GST Intelligence (DGGI) conducted extensive searches at the Indian offices of several foreign airlines, including Etihad, Emirates, Saudi Airlines, Qatar Airways, Air Arabia, Oman Air, and Kuwait Airways. This was part of an investigation into alleged tax evasion related to services imported from these airlines' overseas headquarters to their Indian branches.

Furthermore, DGGI summoned the Indian staff of other major airlines such as Thai Airways, Singapore Airlines, Lufthansa, and British Airways over allegations of non-payment of goods and services tax (GST). The agency contends that services like aircraft maintenance, rentals, and crew salaries overseen by an airline's overseas headquarters are subject to GST in India.

Historical Context and Current Impact

Willie Walsh, reflecting on his time as a CEO in the airline industry, pointed out that the application of tax rules in India has always been a subject of debate due to their complexity. He argued that while there is a global tax structure in place that works effectively, deviations from this structure in India might not yield the intended additional tax revenues. Instead, it could lead to airlines exiting the market.

This risk is particularly significant given the dominance of foreign carriers in India's international air traffic. According to the Directorate General of Civil Aviation (DGCA) data for 2022-23, foreign carriers held a 56% share of international air traffic to and from India, with Indian carriers accounting for the remaining 44%. Emirates led the market among foreign airlines with a 10% share, followed by Singapore Airlines, Etihad, Qatar Airways, Lufthansa, and Air Arabia.

Potential Market Withdrawal

Walsh warned that if airlines face challenges in repatriating their earnings or if double taxation significantly impacts profitability, they might reduce services or withdraw from the Indian market altogether. This could have a negative impact on the network of services available to Indian passengers.

Sustainable Aviation Fuel (SAF) Policies

In addition to tax concerns, Walsh also commented on India's policies regarding sustainable aviation fuel (SAF). The Indian government is considering mandating the use of blended SAF by 2025. However, Walsh suggested that such mandates could lead to higher prices due to limited production and might stall innovation and limit competition.

“The US approach to SAF is the most advanced with a system of tax credits to drive up production levels. This will be more effective than purchase mandates being considered as far and wide as Singapore, India and Europe," Walsh said.

In the US, producers of SAF are eligible for a tax credit, which incentivizes production. In contrast, India's approach might struggle due to its nascent stage of SAF development and limited production capacity.

Future Prospects and Recommendations

Despite the challenges, there is optimism about increasing SAF production globally. According to IATA, SAF production tripled to 300 million liters in 2022, and with supportive policies, it could reach 30 billion liters by 2030. This would represent about 6% of the 450 billion liters annual production capacity needed by 2050.

Walsh emphasized the need for a global standard for a SAF book and claim system to facilitate economies of scale in SAF production and ensure fair allocation of SAF credits without double counting. He also highlighted the importance of diversifying feedstocks and increasing SAF production pathways to meet future demand.

Conclusion

The complexities of India's tax system pose a significant challenge to global airlines, potentially driving them away from the market. While there are alarming signals from the current situation, stakeholders can mitigate these issues through strategic planning and collaborative efforts between airlines and regulatory authorities.

Given India's burgeoning aviation market, the stakes couldn't be higher. Airlines, investors, and tax professionals must stay informed and proactive to navigate these complicated waters successfully. For real-time updates and expert analysis, consider subscribing to our newsletter. Stay ahead of the curve and ensure your investments and business strategies remain aligned with the ever-evolving landscape of global aviation.

By prioritizing smoother regulations and supporting innovative solutions like SAF, India can maintain its standing as a crucial hub in international air travel. The collaboration between the government and the aviation industry will be key to ensuring that India's skies remain open and lucrative for all players involved.

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Disclaimer:

The information presented in this article has been compiled from multiple sources across the internet. It is intended for informational purposes only and should not be construed as investment advice. Any investment decisions should be made in consultation with a reputable financial advisor. The author and publisher of this article are not liable for any losses incurred by investors or traders as a result of the information provided.