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Aviation Development Starts in Georgia

Over the past years Government of Georgia has been spending considerable state budget funds on development of domestic and small aviation sectors.

Domestic airports  are being built, including Ambrolauri Airport (14 million GEL investments) and Mestia airport (20 million GEL investments); Government has also announced plans for constructing a domestic airport in Akhalkalaki, Tusheti, Zugdidi and Omalo.

Despite the mentioned projects, the existing situation hampers development of domestic air companies. ServiceAir is an only company that performs domestic flights from Natakhtari airport to Mestia and Ambrolauri Airports. The company is subsidized from state budget, because this direction of aviation is not profitable. Other airlines do not show interest in domestic flights. High tax rates at Tbilisi and Batumi airports make these directions unattractive for Georgian air companies.

Fuel price and extra taxes frustrate the industry development, specialists noted. Airlines buy fuel without customs clearance for international flights and they do not pay 18% VAT in this case, while airlines have to buy fuel with 18% VAT and excise tax for domestic flights.

For example, if an airline buys fuel without customs clearance for international flights and do not pay VAT, the price of a ton of fuel is 1 000 GEL, while the airline has to pay excise tax (440 GEL for a ton)  and 18% VAT for domestic flights.

Consequently, international flights are more interesting in terms of commercial aspects, compared to domestic flights. Moreover, domestic airlines serve such social objectives as tourism sector promotion, fixation of domestic population in regions, therefore, this direction is not interesting for investors.

To neutralize these uncompetitive conditions, as a result of difference between fuel prices for domestic and international flights, and to promote development of domestic  and small aviation sectors, last week Prime Minister Giorgi Kvirikashvili announced plans for amending Tax Code, under which a part of aviation fuel for domestic flights will be exempted from VAT and excise taxes.

“Domestic aviation is a subsidized field. Therefore, we will exempt that part of aviation fuel for domestic flights from VAT and excise tax”, the Prime Minister said.

It should be also noted that Government subsidizes the price of domestic flights. After planned amendments, prices will decline and the demand will increase for domestic flights. As a result, these factors will create preconditions for domestic aviation development.

Giorgi Chogovadze, head of National Tourism Agency, also expects ticket prices for domestic flights to shrink. Promotion of domestic aviation is a part of tourism sector development policy promulgated by Government of Georgia, Chogovadze noted.

Government’s initiative will propel cheapening domestic flights and new players will appear on Georgian aviation market, Chogovadze noted.

Agriculture flying machines and tourism helicopters also face the same problems. Besides fuel, the mentioned tax refers to lubricants that are widely used by flying machines, especially, helicopters.

For domestic flights, its prime cost is added an excise tax of 440 GEL per ton and VAT tax, that constitutes 18% of total value of the product. This signifies the state budget will not receive 620 GEL for each domestic flights on average, after removal of the mentioned taxes.

Frequency of domestic flights is another issue, because ticket prices are expected to decline. As a result, the demand for domestic flights will increase and frequency of flights may also grow.

It is also necessary  to set strict control on fuel that will be bought for domestic flights, because it will be exempted from VAT and excise taxes, and this category of fuel be used for illegal purposes.

It should be noted that the contract with ServiceAir airline that performs domestic flights will expire soon and Government has already announced tender for performing domestic flights for the next 3 years, including to the Racha-Ambrolauri direction.

Keti Aleksidze, head of Airports Association says that the schedule of all flights has been already prepared before summer season.

“We perform domestic flights to Mestia direction, Mestia-Kutaisi direction, to Ambrolauri. At this stage, the schedule of flights has been prepared before summer season. The tender value is about 10 million GEL, excluding VAT. However, we cannot say what the trade price will be. Tickets sales prices will be deducted”, Aleksidze noted.