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Why so many Indians vacation abroad? - Views on News from Equitymaster
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Why so many Indians vacation abroad?
Mar 20, 2007

With holidays looming ahead, a few destinations are discarded at times due to high costs related to traveling. A Delhi-Bangalore return flight costs as much as a Delhi-Dubai flight even though the latter takes 42% more time. Also, a Delhi-Coimbatore flight costs as much as a Delhi-Bangkok flight while the latter takes 41% more time, according to a report of the CII National Committee on Civil Aviation. That is to say, one can fly almost 41% longer on the international sector than on the domestic for the same price! This incongruity is easily explained by the huge differential in the fuel prices for aircrafts: Aviation Turbine Fuel (ATF) prices in India are 60% higher than the average fuel prices worldwide. And no, our refineries are not inefficient, but the government is making hay: there is a customs duty of 18%, excise duty of 8%, and local sales tax ranging between 20% and 39% across different states, on ATF. Fuel costs constitute 35% of the operating cost of any aircraft. Airline industry claims that a 10% drop in ATF prices can reduce airfares by 4% and they can save up to US$ 450 m per annum if allowed to procure fuel at international prices.

Whose side are we on anyway?
Funnily enough, no foreign airline pays any sales tax on fuel purchases made in India as per a ICAO Convention 1944 and by citing bilateral taxation treaties. So, the taxes are paid on their behalf by the public sector oil companies – IOC and BPCL - and they in turn need support from budgetary resources!

More tax anomalies
‘Avgas’ is another fuel used in the piston engine aircrafts used by flying schools while ATF is used by the turbine-powered aircrafts such as jets and turbo-props. Today, avgas prices are Rs 58 per litre, a markup of Rs 33 over international prices, increasing operative cost of flying schools, making flying training in India unviable. Consequently 17 out of 40 flying schools have closed their operation during the last four years. Avgas is imported by IOC after paying a customs duty of 39.2%. As only 3,600 kilolitres of avgas is imported annually, the Centre gets Rs 42 m as taxes. For this amount, the government has foregone the chance of building up a good team of pilots that will be necessary to man aircrafts if and when we de-regularise the industry! Already pilots are in short supply and their salaries have more than tripled in the last couple of years.

Government’s flawed economics
Sales tax collections on ATF were Rs 4.8 bn in FY04. A further Rs 2.5 bn was generated from excise duty collections. As a proportion of the total sales tax collections by all states in India on all commodities, ATF accounts for a measly 0.42%!

India is reportedly the biggest spender in the world on promoting tourism. It recently spent US$ 100 m in the Berlin fair. To put things in perspective, tourist traffic to India at present is 3.4 m, compared to 6.2 m Indians going abroad. The growth rate for tourists coming to India was 14% YoY in FY06 while the number of Indians traveling abroad grew at a rate of 25% YoY. Also, an Indian tourist spends US$ 200 per head per day abroad as compared to US$ 150 per day by the tourists coming into India. On an average, if one assumes a week’s stay abroad, Indians spend Rs 390 bn every year. At least some of this will be spent in India if domestic sector fares reduce and more than compensate for reduced tax collections.

This is one instance where by just correcting tax structures the government can hope to generate more incomes within India.

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