Regional connectivity proposal facing hurdles

•  The government’s plans to boost regional air connectivity could hit a legal air pocket as leading domestic airlines have opposed the proposal to charge a levy on flights on major routes to fund subsidies for regional flights and are likely to challenge it in the courts.

Reasons behind turbulence:

• Major airlines have termed the proposed regional connectivity levy as “illegal” and “in contravention to the Constitution of India.” According to them, the government is not empowered to levy a tax on airlines to fund the regional connectivity scheme under the Aircraft Act of 1934.
• As a part of its proposed regional connectivity scheme, the Union Civil Aviation Ministry had mooted amendments to the Aircraft Rules of 1937 in August to set up a regional connectivity fund to subsidise the losses of airlines that wanted to fly on regional routes. The fund was proposed to be financed by a levy on domestic flights along with contribution from states and credit proceeds from other sources.
• Passengers will be able to fly to unserved and underserved airports for a fare of Rs 2,500 an hour, under the scheme.
• A levy in the nature of tax can only be levied having regard to the provisions contained in the Article 265 of the Constitution of India i.e. by authority of law. Therefore, the draft rules as published ultra vires the Constitution of India and is illegal.
• Also, according to the airlines, imposition of a regional connectivity levy would require amendment to the Aircraft Act, 1934 and not the rule.
• Besides, Section 5(2) (ab) of the Aircraft Act of 1934 does empower the Centre to make rules for economic regulation of air services but it doesn’t authorise it “to introduce a levy in the nature of tax on air services.”

About Regional Connectivity Scheme

• This will be implemented by way of: a) Revival of airstrips/airports as No-Frills Airports at an indicative cost of Rs. 50 crore to Rs 100 crore; b) Demand driven selection of Airports/airstrips for revival in consultation with State Govts and airlines
• Viability Gap Funding (VGF) to airline operators: RCS only in those states which reduce VAT on ATF to 1% or less, provide other support services and 20% of VGF
• Concessions by Stakeholders: a) There will be no airport charges; b) Reduced Service tax on tickets (on 10% of the taxable value) for 1 year initially ; c) Reduced Excise duty at 2% on ATF picked at RCS airports
• State government will provide police and fire services free of cost. Power, water and other utilities at concessional rates
• Creation of Regional Connectivity fund for VGF through a small levy per departure on all domestic flights other than Cat II/ Cat IIA routes, RCS routes and small aircraft below 80 seats at a rate as decided bythe Ministry from time to time
• VGF to be shared between MoCA and State Governments in the ratio of 80:20. For the North Eastern States, the ratio is 90:10

By: Vishal