Aviation is perhaps the hardest hit industry all around the globe due to the unprecedented fuel price rise. Fuel cost is as high as around 50 per cent of the flight operation cost these days. The rise in fuel cost has forced many airlines to ground aircraft, reduce frequency and cut manpower. In Nepal also, fuel price has now become the biggest concern for the airline industry, passengers’ society and government.

As air travel helps all economic sectors grow, it is imperative that there be a conducive environment for the airline industry to survive and grow. In our context, airline industry is more important due to geographical conditions as they are restrictive of other modes of trasportation. However, due to ever increasing fares air travel is becoming more and more inaccessible for a large segment of our population.

Air travel is very expensive in Nepal due to some key reasons: 1 Tax components constitute a large part of the total cost of air travel.

2 Nepal Oil Corporation makes a good margin on aviation turbine fuel.

3 Belief of policy makers and general public that the airline industry is a high profit business.

For enabling the airline industry to offer cheaper air travel and more frequency of flights, it is necessary to waive through the coming budget 2008-09 various taxes incumbent on airline sector. These include 10 per cent lease tax on aircraft rental cost, 13 per cent VAT on aviation turbine fuel (ATF), 13 per cent VAT on aviation insurance premium, 13 per cent VAT on import of spare parts and 15 per cent TDS on payment to foreign experts. Exempting the airline sector from these taxes and enabling it to reduce fares will result in expanded air travel to/from remote regions of the country. The net result will be reflected in other economic sectors.

In international aviation, Nepali airlines are at a great disadvantage as ATF in Nepal is the most expensive. Despite having their base here they have to lift more expensive fuel than competing foreign carriers. Likewise, lease tax is uniapplicableque to Nepal compared to our neighbours and hence the cost of flight operation is more expensive for local airlines leaving them at a competitive disadvantage.

Over some years, tax cost elements have increased radically. The three per cent lease tax was raised to 15 per cent and then reduced to 10 per cent. VAT on aviation insurance premium was not applicable a few years earlier. Aviation fuel price has increased from $1100 per kiloliter (KL) to $1500 per KL, a 36 per cent increase within a span of a few months. Total benefits accruing to the economy will surpass the total tax collections from the above tax components if exemptions are made.

On the other hand, the travelling population, including those from the hinterlands and those moving to foreign lands for employment, will benefit from reduced fares and more flights. As cheaper fares will help increase more economic yields per flight, local airlines will increase frequency of flights. Reduced fares and more flights will also have a great positive impact on the overall tourism industry in the country.