India has become one of the top three markets for business aviation in the Asia-Pacific region, along with Australia and China, but the challenges ahead threaten to undermine the sector on the subcontinent.

The rise of the market here was sudden, largely driven by the country's economic growth and changing attitudes toward business aviation.

Business people in India used to be reticent about showing their wealth. But now, even ostentatious displays are deemed acceptable.

What is more, executives and entrepreneurs in India increasingly see corporate aviation as a valuable business tool. For those who need to visit three or four smaller cities in a day, owning an aircraft is a necessity. India's commercial aviation industry is inefficient for point-to-point travel between second- and third-tier cities.

At the recent India Aviation air show in Hyderabad, one of the aircraft on display was an Embraer Phenom owned by Joyalukkas, a jewelry store chain in India. The owners need a business jet to visit their suppliers in small cities and towns. The Phenom very light jet has the range to cover all of India and some neighboring countries.

However, there will always be those who opt for the larger end of the line because they have overseas companies and need the extra range bigger jets provide. Indian firms are increasingly investing overseas. Tata Group has bought brands such as Tetley Tea, Land Rover and Jaguar. It turns out that running a foreign business can be easier than running one in India. The rules and regulations overseas are less troublesome and taxes are lower.

High taxes and red tape are weighing down India's business aviation industry. Importation of business aircraft is subject to an 18.5% duty. Aircraft owners, however, can reduce this to a 3% tariff if they agree to lease aircraft for charters. However, there is also a 12.5% value-added tax (VAT), a higher rate than for many other goods sold here, because the government assesses business jets as a luxury.

The tax situation is leading some business owners to avoid the problem altogether by registering the aircraft overseas and using it in-country no more than six months out of the year. Import duty is not applicable in those cases. This loophole, however, is something the finance ministry is reexamining.

Aircraft spare parts are also subject to 18.5% import duty and 12.5% VAT. The duty, however, can be reduced to 3% if the part is for a non-scheduled commercial operator (NSOP).

Maintenance service providers want to have a pool of spare parts on hand, however, there is no way of knowing whether the part they import will eventually be sold to a private operator or a NSOP. Unless the MRO operator can identify the specific aircraft the part will be used on, the tax department assumes it is subject to the 18.5% rate.

Because of this some industry players have decided to refrain from stockpiling, which means business jet operators must wait for a part to be couriered—usually from Dubai or Singapore.

Without immediate access to spare parts, aircraft may have to be grounded. Most operators are more than willing to wait a few hours for a part for safety's sake, but if the aircraft has to be grounded for two to three days, there is a temptation to keep flying.

A bonded warehouse to house spare parts in-country is one solution. The tax will only be charged once a part leaves the warehouse. But obtaining government approval for this is a protracted, expensive procedure.

MRO firm Air Works has set up a bonded warehouse near Bangalore airport and original equipment makers are scrambling to make use of it. At the India Aviation air show, Embraer and Hawker Beechcraft signed deals with Air Works.

Another hurdle for business aircraft here is an inadequate airport infrastructure. Though new airports are being built country-wide for commercial aviation, the bizav sector appears to be an afterthought.

Once commercial airlines move to the new airports, the old sites could be converted for business aviation, but instead business jet operators are encouraged to move to the new airports, while the outmoded ones are largely left abandoned.

Two cases in point are the new airports in Hyderabad and Bangalore, Rajiv Gandhi International and Bengaluru International, respectively. Rohit Kapur, president of India's Business Aircraft Operators' Association, says the old airports in those cities are largely no longer being used for business aviation.

He says one of the problems is that when the government awarded the contracts for construction of the new airports in Bangalore and Hyderabad, the developers made it contingent upon no other airport being developed within 150 km (93 mi.) of the new facilities. The developers argued that there is no way they are going to invest millions developing a new airport if a competing facility is allowed in the area.

The other issue is that commercial passenger traffic is growing so fast that some of the busiest airports—such as Mumbai's Chhatrapati Shivaji International—are subject to slot constraints, which are being imposed on the business jet operators. Sometimes up to 48-hr. notice is required to obtain a slot. But this defeats the whole purpose of business aviation—being able to fly whenever and wherever you like on demand.

Mumbai is India's main business center. But if the movers and shakers are unable to secure parking spots, they will be less likely to purchase business aircraft. There also appears to be no ready solution to the parking problem because the airport is land-constrained.

At the new airports too, there may be little in the way of dedicated facilities for business jet operators. Often business jet passengers have to go through the same terminal building and the same customs, quarantine and immigration desks as commercial passengers.

There are also only two fixed-based operators (FBOs) in India serving business aviation, at the airports in New Delhi and Mumbai. This is a very different situation than in the U.S., where business jet operators often have a choice of FBOs at each airport. In the U.S., FBOs make money from the sale of fuel, but in India they are denied that concession. Also in the U.S., a third-party company is in charge of the FBO, but in India the airport operator owns the FBO business as well, so there is no incentive to allow competition.

Generally speaking, the root of the problem is that India's civil aviation ministry is focused on commercial aviation because what happens with the airlines affects a larger number of people. But business aviation can have a big economic impact as well. “If the captains of industry are unable to function properly and make efficient use of their time, then it will impact on prospects for India's businesses and economy,” says one local business jet operator, summing up the mood in the industry.

If progress is not made in addressing these issues, Indian business people will continue to fly. But they will be flying overseas and taking their investment dollars with them.