In a respite for airlines, the state government of Maharashtra has announced to reduce value added tax on aviation turbine fuel to 7% from the prevailing rate of 18%.
The reduction in tax has been given till 14 November and comes at a crucial time when Indian airlines are reeling under high jet fuel prices following the war in West Asia, according to a government order reviewed by ET.
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Fuel prices are a major cost component for Indian airlines as they account for 35-40% of an airline’s expenditure.
The Ministry of Civil Aviation has been pushing the state governments in Delhi, Tamil Nadu, West Bengal and Maharashtra, the four states identified as levying the highest VAT on jet fuel.
The reduction will be a big fillip to airlines as they will now spend less to refuel at Mumbai airport which is the second busiest in the country following Delhi and handles around 15 % of air traffic. Other than Mumbai, Pune and Nagpur also handles substantial air traffic.
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Maharashtra government’s decision to reduce VAT now makes Mumbai more competitive than Delhi which levies a VAT of 25%.
Global average jet fuel prices hit $162.89 per barrel for the week ended 8 May, from $99.40 at end-February. “With fuel accounting for up to 40% of an airline’s operating cost, any reduction on duty and tax can reduce cost of operations.
Airlines have been raising the issue of adverse impact of VAT on structure of jet fuel price in India. The tax is levied on the price as a percentage of the fuel price rather than as a fixed amount.
Airlines have long argued that converting these taxes into fixed ones would reduce the impact of global price swings on the industry. They have also reiterated their demand for ATF to be brought under the goods and services tax (GST) regime, which would allow carriers to claim input tax credit (ITC) on fuel purchases.
Tata-owned Air India is implementing a sweeping cut in international services for three months, starting June, as soaring jet fuel prices squeeze its operations. The airline also cautioned it may reduce more flights if jet fuel prices remain high.