Introduction
RCS
Salient features of RCS
Recent developments
Comment
The Indian aviation sector is one of the fastest-growing sectors in the world. India's domestic traffic has more than doubled from around 61 million in financial year (FY) 2013-14 to about 137 million in FY 2019-20, a growth of over 14% per annum. International traffic has grown from 47 million in FY 2013-14 to around 67 million in FY 2019-20. India is currently the third largest domestic aviation market and is expected to become the third largest overall (including domestic and international traffic) by 2024.
In the past two decades, various factors have transformed the face of Indian aviation, including:
- expanding incomes;
- an aspirational middle-class;
- the influx of low-cost carriers;
- better connectivity to far-flung cities; and
- a rise in regional air travel.
However, while India is one of the fastest-growing aviation markets in the world, the fact remains that only a minority of its population uses air transport, and air services have been predominantly confined to big metropolitan cities and other state capitals.
The government saw this viability gap in the sector and decided to step in with a vision to develop a regional aviation market.(1) To materialise this, it decided to offer incentives to airlines for flying on unserved and underserved routes and airports of the country.
In June 2016, the Ministry of Civil Aviation published the National Civil Aviation Policy (NCAP). One of the objectives of NCAP was the regional connectivity scheme (RCS), also known as UDAN ("Ude Desh Ka Aam Nagrik"), which translates to "let the common citizen of the country fly". The RCS aims, among other things, to:
- make flying affordable for the masses;
- promote tourism;
- increase employment opportunities; and
- promote balanced regional economic growth.
The first RCS flight was inaugurated by the prime minister on 27 April 2017. Since then, 303 routes connecting airports across the length and breadth of the country have been commenced. Within three years, 53 airports, including five heliports and two water aerodromes, have been developed and operationalised under the RCS – an impressive result when compared with the 76 airports that have been developed in the 70 years since India's independence. Over 5 million passengers had travelled on RCS flights by the end of November 2020, and newer modes of air transport have been introduced, including seaplanes, helicopters and flights via smaller aircrafts.
Under the RCS, airline operators are supported through
- concessions by the central government, state governments and airport operators to reduce the cost of airline operations on regional routes; and
- financial support (viability gap funding (VGF)) to meet the gap, if any, between the cost of operations and expected revenues on such routes.
The Regional Air Connectivity Fund Trust maintains the regional connectivity fund (RCF) by collecting a levy of 5,000 Indian rupees per departure of domestic flights on category I and III routes, except on specified small aircraft. Further, state governments/union territory administrations contribute their specified share of VGF at 20% or 10%, wherever applicable. VGF is disbursed to the selected airline operators out of this fund.
The key features of the RCS, which is aimed at making flying affordable for the masses, are the following:
- The RCS is applicable on routes of a length between 200km and 800km, with no lower limit set for hilly, remote, island or security-sensitive regions.
- The central government will provide concessions of 2% excise duty on value added tax (VAT) and service tax at one-tenth the rate and 2% excise duty on liberal code sharing.
- The RCF was created to fund the scheme via a levy on certain flights. States are expected to contribute 20% to the fund.
- For balanced regional growth, allocations will be spread equitably across five regions – the north, the west, the south, the east and the north east – with a cap of 25%.
As a part of this initiative, the government set up the RCF, which is funded by levying a certain fee on domestic flights, except those on Category II/IIA(2) routes under the Route Dispersal Guidelines issued by the Ministry of Civil Aviation. Further, for the levy to be applicable, the flight should have at least 80 seats. Most operators recover the money from passengers, who pay an RCS levy as part of their ticket fare. Money collected from the RCF is channelled as incentives, or VGF, to airlines operating on RCS routes. Each RCS flight has a specific number of seats that are thus incentivised.
As capacity utilisation is still low given the reduced number of passengers taking flights as a result of the covid-19 pandemic, the resulting contribution from airlines has reduced, forcing the government to make changes so that the continued utilisation of the amounts from the fund does not erode the corpus. Therefore, airlines have been asked to reduce the frequency of flights or the number of RCS seats, so that the need for funding the incentivised seats has reduced.
A recent development in the tax treatment of the RCF has also provided relief in this regard. To exempt the Regional Air Connectivity Fund Trust's income from taxation, which was much needed to sustain the RCS initiative and maintain the scheme, the Central Board of Direct Taxes announced, via a notification dated 7 January 2022(3) that the RCF shall be eligible for exemption under section 10(46) of the Income Tax Act 1961.
As per the notification, the income of the trust from the following sources shall not be included in its total income computed for the purpose of taxation:
- grants from the government;
- the receipt of levies from airlines;
- the forfeiture of bank guarantees due to non-fulfilment of obligations by airlines; and
- any interest earned on income from the above sources.
The notification further lays down that trust shall not:
- engage in any commercial activity; or
- change its activities or the nature of the specified income throughout the financial year.
The trust shall also be required to file a return of income in accordance with the relevant provisions of the Income Tax Act 1961.
This notification shall be deemed to have been applied for the period from 1 June 2020 to 31 March 2021 for FY 2020-2021 and shall apply with respect to FYs 2021-2022, 2022-2023, 2023-2024 and 2024-2025.
With the ongoing covid-19 pandemic and new variants emerging, it is unclear when air traffic numbers will get back to pre-covid times. In the interim, the tax exemption granted by the government may bring some relief to the regional aviation industry, which is already going through a turbulent phase. By this measure, the government has evidenced its support of the growth of the aviation industry in India, and, more specifically, the promotion of aviation operations under the RCS, which is of immense importance to the economic and aspirational development of Indian regions.
For further information on this topic please contact Syed Tamjeed Ahmad or Rakhee Biswas at Spaviatech Law by telephone (+55 21 2276 6200) or email ([email protected] or [email protected]). The Spaviatech Law website can be accessed at www.spaviatechlaw.com.
Endnotes
(1) Regional locations are locations other than the metropolitan and high-traffic cities of Delhi, Bangalore, Mumbai, Kolkatta, Chennai, Hyderabad and other cities with a substantial aviation demand.
(2) Category II routes are routes connecting stations in North Eastern Region, Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Andaman & Nicobar and Lakshadweep. Category IIA routes are routes within the north-eastern region, Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Andaman & Nicobar and Lakshadweep and Cochin-Agatti-Cochin.