Aviation Security and Ground Handling by Dr.Sanat kaul

Scrap 5/20 rule, reduce taxation to make airlines turnaround

Sanat Kaul, Jan 26, 2015, DHNS

What is 5/20 in Indian civil aviation? Air Corporation Act of 1953 was repealed in 1994 which abolished the monopoly of Indian Airlines and Air India and allowed private airlines to operate in India.

However, Air India maintained its monopoly over international flights as no other airline was allowed to fly abroad. Slowly, domestic airlines led by Jet started demanding that they should also be allowed to go abroad. Since overseas fights involved a bilateral air service agreement between two countries, the airline of a country have to be designated in the agreement.

In order to enable private airlines to go abroad, some criteria was required and this was evolved as the formula of 5/20. This meant that an India airline could qualify for an international flight only if it has completed 5 years of domestic service and has 20 aircraft. This policy formulation was unprecedented as it was not found in any other country. It remains so even now.

Around the time the repeal of Air Corporation Act took place in 1994, the Ministry of Civil Aviation found that private airlines would not undertake unviable routes to regional cities which Indian Airlines was undertaking (after the demise of Vayudoot which is an airline owned by Air India and Indian Airlines) as part of their CSR.

The DGCA then introduced Route Dispersal Guidelines (RDG) to replace the work being done by Indian Airlines. The RDG mandated that private airlines running on certain metro routes must also undertake certain unpopular routes like North-Eastern states, Andaman and Nicobar islands or J&K. This was a forced cross subsidy imposed on private airlines.

For private airlines going abroad, foreign routes were not taken into account while calculating the quantum on tier II routes under RDG. It is also known that due to skewed taxation on domestic aviation by way of extremely high sales tax on ATF by some states like for Mumbai and Delhi, high customs duties and cartelisation by public sector oil companies and also very high other charges, domestic operations by an Indian airline is less remunerative than foreign operations where there is no sales tax or custom duty on ATF.

As a result, to stop new airlines for seeking flights abroad, the 5/20 rule was brought. This also gave older airlines an advantage over younger airlines.

However, at a national level, with liberalised bilateral aviation agreements, it was found that the few airlines who were permitted to go abroad were not able to use the bilateral rights in full. As a result, the CAG in his report of 2011 has pointed out, foreign airlines coming into India utilise 65 per cent of their entailment, our airlines utilise only 30 per cent. This is so because these airlines do not have the aircraft for this purpose specially for long haul trips involving more than 5 hours journey.

Therefore, the CAG recommended more and more airlines be designated on international routes so as to cover the gap. The reason to abrogate the 5/20 rule is, therefore, to allow all registered airlines of India to seek routes from the government to go abroad to cover this gap.

Reasons to retain 5/20

The real reason to retain this rule of 5/20 is, therefore, essentially to force domestic operation by new airlines as domestic operations are often unremunerative due to high taxes, duties and charges,and intense competition.

To add to that is the additional burden of RDG which is not there in the case of foreign operations of an Indian airline. In other words, 5/20 rule is acceptance of the reality that many airlines would prefer to operate on foreign routes as domestic routes become unremunerative due to high operating costs and intense competition.

If this is the case, then why the government does not do something about it? Airlines of India are showing a cumulative loss of $10 billion over the last seven years. Some airlines want to get out of domestic flying but 5/20 rule along with GDG is keeping them bound down.

While 5/20 rule has no other justification and is reducing India’s international aviation exposure, there is a need to look inwards to see whether ‘tax terrorism’ by state and central governments applies to aviation sector.

Actually, it is a case of killing the goose that lays golden eggs. It is high time that like taxi and truck associations which go on strike due to high taxes, airlines should show solidarity and stop services to Delhi and Mumbai for a few days to make these states reduce extremely high sales tax on ATF.

What have we achieved by the 5/20 rule? We have protected the domestic aviation market by this devious means. Is this good governance? The answer is no. We need to have better domestic fiscal policies both at Central and state level towards aviation, a sector which grows at double digit, and can grow even faster, if taxes are lowered. It will become like what telephony is today in India- cheap and affordable by all and yet brings good revenue to the government.

How can we do it? Abolish 5/20 rule but extend RDG to foreign routes of Indian Airlines also. Further, routes under RDG need to be dynamic and changing. Many existing routes under RDG are now profitable and should be taken out and new routes which are uneconomic should be brought in.

Once our domestic taxation and charges are brought down resulting in even higher growth in aviation, an Essential and Remote Area Fund could be thought out on lines of Universal Obligation Fund under telecom sector which helps bring telephony to remote areas.

(The writer is Chairman of International Foundation for Aviation and Development - India Chapter)