Fight or flight? The tax battle of Africa’s aviation industry
“A world with a sudden limit on air travel would be tremendously different from the one we live in now” – Charles C. Mann, Author.
Africa’s aviation industry plays an important role in its journey to sustainable development and economic growth. Ease of travel facilitates trade and tourism with positive effects on job creation, government tax revenues and living standards.
Air transport alone is said to support 6.7 million jobs in Africa and contribute US$67.8 billion to Africa’s GDP. African governments continually seek ways to maximize the industry’s potential: taxation being the most prominent among them.
Airport taxes in Ghana
In December 1963, the then President of Ghana and the National Assembly, enacted the Airport Tax Act (“ATA”), 1963 (Act 209) which imposed a tax of US$50 and GH¢1 (then ¢10,000) for all inter and intra country air travel respectively, with some exceptions for infants and transit passengers. The ATA further provided that 40% of the airport tax revenue collected by the tax authorities, be paid to Ghana Civil Aviation Authority (GCAA), the regulatory agency with the mandate for air transport development and operation in Ghana.
In a bid to upgrade Ghana’s airport facilities to meet the burgeoning demand for air travel, the ATA was amended in 2013 to allow The Ghana Airport Company Limited (GACL), an offshoot of GCAA, to retain all of the airport tax revenue generated, as opposed to the earlier 40% allocation. Consequently, GACL’s profits shot up from GH¢19million in 2014 to GH¢184 million in the following year. GACL, with the hope of maintaining this upward trend, committed 70% of airport tax revenue to funding airport infrastructure and development projects. In addition, staff development programs in the areas of airport recovery, crisis and disaster management, and airport management were undertaken.
Unfortunately, the Government of Ghana compensated for this reallocation of tax revenue, by imposing a 17.5% VAT on domestic air travel in July 2015, in addition to already existing high aviation fuel taxes such as the price stabilization margin and export tax.
Other African countries
This situation is not peculiar to Ghana alone. Other African countries notably South Africa, Nigeria, Kenya and Egypt also impose relatively high taxes on air travel. Aviation taxes on international travel in Egypt and Kenya currently stand at approximately US$25 per entry whilst Nigeria is reported by The International Air Transport Association (“IATA”) as having the highest aviation taxes in the world as at the end of 2016
Reasons and justifications
High taxes in Africa’s aviation industry have largely been attributed to taxes on aviation fuel, despite The International Civil Aviation Organization’s (“ICAO”) recommendation to exempt fuel for international travel from taxes.
In 2013, Tony Tyler, the then Director-General and chief executive of IATA stated that “aviation fuel in Africa costs 21% more than the global average due to the high taxes imposed on aviation fuel. Similarly, Elijah Chigosho, Secretary General of The African Airlines Association, revealed in 2012 that fuel prices in Africa accounted for 45% to 55% of the operational cost of airlines because of the various taxes, duties and levies on fuel.
Most African governments have justified the high aviation taxes on the grounds that they help generate the funds needed for developing the aviation industries in their respective countries. South Africa, for instance, imposed the Air Passenger Tax to help recover a ZAR16 billion (approximately US$1.216 billion) investment in aviation infrastructure. Some countries also purport to impose airport taxes for environmental protection projects although evidence of this is limited.
Impact on business and travel
The demand for air travel, specifically domestic and short haul regional flights, is very responsive to price changes, in other words, it has “elastic demand”. High taxes raise the cost of air travel beyond the reach of potential passengers, since airline operators invariably pass these taxes on to the final consumer. Most people choose alternative means of transport, such as road, rail and sea, in the face of such prohibitive pricing.
For example in Ghana, soon after the imposition of the 17.5% VAT charge on domestic airline travel, passenger throughput slumped by approximately 69%. People were still travelling, however they were using slower and more dangerous routes.
In Nigeria, it is estimated that only 1% of the population of 170 million people, have access to air travel. One can only imagine the crippling effect this has on businesses, especially small and medium size enterprises looking to expand into other territories.
While the negative effects of high taxes on air travel is evident, one must not forget the Aircraft operators who are bearing the brunt of these developments. With ebbing air travel demand, aircrafts are forced to fly partially empty aircrafts at the same operational costs, making it almost impossible for them to break even. Currently, most African airline operators are struggling to survive, and over the last few years in Ghana in particular, a number of airlines have exited the aviation industry.
Change is needed
If inclusive and sustainable growth is to be achieved in Africa, air travel cannot be a privilege reserved for a microcosm of the population. There is an urgent need for a comprehensive review of taxes in consultation with the businesses they affect, in order to determine optimal levels which will not inhibit economic growth.
Recent rhetoric in many African countries has been about “widening the tax base” and roping the informal sector into the “tax net”. It is about time this vision became a reality. The aviation industry should not be seen as an easy target to generate revenue, but rather a partner in development.
Recent developments in Ghana
The move to abolish the 17.5% VAT on domestic air travel in Ghana as stated in the recently read budget statement on 2 March 2017, is a welcome one and we look forward to similar changes across Africa in order to stimulate the much needed economic growth for our continent.