Budget Provisions
The budget has increased the outlay for the Ministry of Civil Aviation by 21% at Rs 12165 crore from Rs 10031 crore for FY2008-09. However, the revised estimate for FY2008-09 was at Rs 7490 crore against the outlay of Rs 10031 crore.
The budget proposes to abolish Fringe Benefit Tax (FBT).
The budget proposes to increase the MAT limit from 10% to 15% and extend the period allowed to carry forward the tax credit under MAT from 7 years to 10 years.
Industry Expectations: Not fulfilled
Budget Impact
The increased allocation to the Civil Aviation sector is a positive, as this would mean higher Infrastructure spent and upgradation of airports and services.
The abolition of FBT is beneficial to the sector as it grants free/concessional passages to employees & their family; crew expenses such as hotel accommodation, passenger hotel accommodation and catering & In-flight entertainment expenses are high.
The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector. On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years. Also, the hike in MAT will not be earnings dilutive but will only be cash flow dilutive.
The increase in liability towards MAT will be matched by an incremental deferred tax credit. Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.
But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.
So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilutive but cash flow dilutive. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.
Stocks to watch
Jet Airways, SpiceJet
Outlook
The budget had not much to offer for the civil aviation sector except for abolition of FBT and increased allocation.
Their demand for cut in taxes on ATF, which accounts for about 40% of the cost of any airline company, remains still un-answered. The sector is reeling under losses and needs support from the government in terms of ATF taxes.
The increased allocation would be a positive for the sector, as this would mean higher Infrastructure development. The slowdown in the economy has impacted passenger traffic and the sector has a long way to go until it turns in the green.