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Business News of Monday, 11 January 2021

Source: The Nation

How removal of VAT will affect operations, by airlInes

Airline operators have expressed divergent views on how the removal of 7.5 per cent Valued Added Tax (VAT) hitherto factored into domestic airfares will affect their operations.

They said though the removal of VAT, which became effective since January 1, 2021 could bring about considerable reduction of airfares, it was a step taken too late after two years of agitation by the Airline Operators of Nigeria (AON), the umbrella body of local carriers.

The latest suspension order for VAT was contained in the 2020 Financial Act recently signed into law by President Muhammadu Buhari.

The development, which was confirmed in a tweet at the weekend by a member of the bill drafting committee and West Africa Tax Lead, PwC Nigeria, Taiwo Oyedele indicated that effective January 1, 2021, commercial flight tickets has been exempted from VAT.

Oyedele had tweeted: “Next time you fly, cross check that you’re not wrongly charged VAT.”

He expressed optimism that fares should expectedly go down.

In 2018, government had suspended five per cent charges on imported commercial aircraft and spare parts by issuing an executive order but, the Federal Inland Revenue Service (FIRS) claimed to be unaware of such a directive, hence it was never implemented leaving airlines confused on the pronouncement.

One of the major agitations of airlines is the non- implementation of this directive after it was first made public as they insisted that VAT among other charges on airlines accounted for the high cost of air fares.

Speaking in an interview at the weekend, Chairman of West Link Airlines Captain Ibrahim Mshelia said the suspension of VAT was a good development for domestic carriers.

Mshelia remarked: “if implemented, the removal of Value Added Tax will ease, standardize and harmonize our system with international best practices. It is a good move in the right direction.”

Also speaking, the Chief Operating Officer Dana Air, Obi Mbanuzor said Dana Air was happy with the removal which should naturally reflect on the fares but insisted that there are other factors inflation to dollar access which still wreak havoc on the earnings of airlines.

“We are happy about the removal which we feel should naturally reflect on fares and possibly bring it down but with the inflation of other aspect of the chain like dollar rate this might not be possible. We know the government has no control over this but it is a major concern.

With all the other extraneous cost being borne by airlines, he, however, noted that the adjustment to the price of flying may be there but appreciated the government’s gesture.

“So we are not saying it won’t affect but might be slight because other factors are still springing up and it’s a chain. Policy! Policy! Policy! Will impact the airlines better but this is also appreciated. One step at a time and this is one very good step at getting it right,” he said.

However, an aviation investor who spoke under conditions of anonymity stated that its airline never applied VAT in its pricing because they knew VAT was exempted for airline tickets.

“We wanted to find out if any airline had VAT included in their tickets charges and we confirmed it wasn’t so. So this so called instruction is of no consequence whatsoever to fares. VAT was never a consideration.”

Head of Research Zenith Travels, Olumide Ohunayo who responded to the questions bordering on the VAT removal expressed measured optimism that the fares may fall slightly but stated that with the number of hidden charges on tickets, he does not expect very much adjustment.

He said, “I’m happy to see the implementation of the VAT because in the first place, the airlines were putting it on the ticket and often times as in virgin Nigeria case they will not be remitted to the federal government and this amount was put on tickets and taken from passengers.

“It is a norm in other places that transportation do not have these VAT charges I expect that the difference in the fare now will be almost significantly almost insignificant because if you look at that 7.5 per cent from the total ticket and knowing full well that most of the airlines have loaded charges and not the fare which is where the VAT should have come from.

“The fares were loaded with security, fuel surcharge and other charges I don’t expect much difference in the ticket prices those were the hidden charges airlines benefited from and now it is gone. We expect that airlines should be able to issue tickets stating clearly the fare and what the other charges are; it should not be hidden anymore so we can have some progress in the fare structure.

“I am happy finally that after over two years of beating around the bush, we get it and it has finally been implemented.

“Removal on aircraft spares and parts that will impact o the airline and bring them some succor reduce their cost of operations and it would be better for everyone, I expect the fares to go down, the fares should go down slightly,” he noted.

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