Give fiscal support to brownfield airport projects

Jayakrishnan

AIRPORTS are regarded as a basis for future development and growth of Indian economy. There are as many as 449 airports/airstrips in India, of which only 82 ar e currently operational and the rest are unutilised or at best being used for occasional aircraft operations. Export by air accounts for 35% of the total value of export from India. Further, 97% of foreign tourists arrive in India by air.

Air cargo accounts for a major chunk in the total value of exports from India and for the tourism sector and it is the second largest foreign exchange earner in the country. In other words, the sector contributes directly to India’s international competitiveness and the flow of foreign investment. In this context, a huge impetus has been given to it in the eleventh Plan. However, a policy flaw in respect of fiscal concessions to airport projects may hamper private investment in this sector.

Section 80-IA of the Income Tax Act, 1961 provides for a tax holiday for a period of ten years to enterprises engaged in certain infrastructure projects, including airports. As per the nomenclature of this section, only “new infrastructure facility” is qualified for tax holidays. The concept of new facility is incorporated as a negative test in law by ruling out modernisation and redevelopment of existing projects for tax holiday, as they do not meet the test of “new infrastructure facility”. However, it is also specifically extended to reconstruction/ revival of power generation plants, renovation and modernisation of power transmission and distribution network. But, brownfield projects in airport sector are yet to receive such a positive grace from policymakers. This disparity in the eligibility parametres for tax holiday may be an impediment in meeting the target of Rs 20,27,169-crore investment projected by the planning commission in the infrastructure sector during the eleventh plan period.

The policy flaw may have a negative impact on attracting private investments in the airport sector. Air passenger traffic in India has shown exponential growth during the last few years. As per the Mid Year Review 2007-08 of the finance ministry, passenger traffic during the first half of 2007-08 at domestic terminals and international terminals have shown a growth of 26.5% and 12.3% respectively. This boom in passenger traffic is expected to continue during the Eleventh Plan period. This probable potential in the volume of passengers will inevitably result in corresponding growth in aircraft movements. The number of aircraft is expected to increase by about five times during the period, which warrants substantial augmentation in airport infrastructure. In order to match the growth projections, the eleventh plan envisages an investment of about Rs 40,880 crore for the airport sector, a major portion of which is meant for modernisation and redevelopment of airports. Therefore, enhancement of private investment in airport infrastructure is crucial, which is expected to constitute more than 65% of the total investment in the sector. A minimum guarantee of financial viability is the basic pre-requisite for attracting any investment. That is the case with airport projects also. Factors such as ambiguity on risk allocation, long gestation period etc make brownfield airport projects financially unviable for the initial period. However, financial viability can be corrected by way of government support through fiscal concessions. In the absence of any such government support, attracting private investment in brownfield airport projects seems to be very challenging. Therefore, it is highly necessary to do away with the disparity in the eligibility parametres for tax holidays under Section 80-IA and to treat brownfield airport projects in par with brownfield power projects.

Infrastructure inadequacies in the airport sector will constitute a significant constraint in realising the development potential of the country. The growth rate aimed by the eleventh plan may not be achieved without attracting huge private investment in brownfield airport projects, for which a rational and enlarged fiscal incentive in the form of a tax holiday is crucial.

(The author is partner, Corporate Law Group)