Rationalising taxes on aviation turbine fuel (ATF) could bring down operating costs of airlines by an average of 10-15 per cent, industry experts say.
Domestic airlines such as SpiceJet, Jet Airways and Indigo blame steep jet fuel prices (due to high tax components) for their high operating costs. The industry has been demanding rationalising of ATF State taxes, which are as high as 30 per cent in some places.
According to analysts, if the State taxes are brought to around 4 per cent (which most States have found favourable), it could help airlines save as much as ₹5,000 crore in their fuel bills. Fuel bills account for almost 50 per cent of the operating costs of an airline.
Estimates show that domestic airlines spent around ₹27,000 crore on ATF in 2013-14. According to the estimates of the Centre for Asia Pacific Aviation, the industry had a combined loss of $1.77 billion (around ₹11,200 crore) in 2013-14.
For example, Air India, which buys about 70 per cent of its fuel from domestic suppliers, bought about 12.7 lakh kilolitres of ATF locally in 2013-14, incurring an expense of around ₹9,000 crore.
On an average, every kilolitre of fuel bought locally cost the national carrier around ₹70,500, inclusive of taxes. Assuming it paid an average tax rate of 25 per cent (as Air India’s refuelling was mainly from the larger centres) in 2013-14, a uniform 4 per cent tax would have helped the airline save as much as ₹11,900 per kilolitre or about ₹1,500 crore in 2013-14.
While some States have started to bring down value added tax on aviation fuel sales, the problem of high taxation continues to plague domestic airlines due to the reluctance of high consumption centres to bring down the levies.
Nearly 65 per cent of all ATF sales in the country take place at five centres – New Delhi, Mumbai, Chennai, Bengaluru and Hyderabad. State level VAT at these centres range from a maximum of 29 per cent (in Tamil Nadu) to a lowest of one per cent (in Andhra Pradesh). “If all States bring the levy to uniform 4 per cent, then savings by airlines on fuel bills will be about ₹ 5,000 crore, taking 2013-14 expenses as the base,” an analyst said.
“Globally, fuel accounts for around 30-35 per cent of an airline's cost. In India, the additional taxes and duties bring up this percentage to around 45-50,” says Vikram Krishnan, Partner, Aviation at the Dubai office of consultancy firm Oliver Wyman.
KPMG’s submission to the Ministry of Civil Aviation has also voiced a similar view.
The Aviation Ministry, on its part, has been making an effort by speaking to the States, many of whom have rationalised taxes. West Bengal, Jharkhand, Madhya Pradesh, Rajasthan and Chhattisgarh, among others have brought VAT on ATF down to 4 per cent. Even Maharashtra levies a 5 per cent VAT on ATF on all airports, except Mumbai and Pune where it is 25 per cent.
However, Krishnan said larger centres need to reduce tax as bulk of the traffic as well as refuelling will continue to remain there in the foreseeable future.
From April to November,2014, 3.692 million tonnes of ATF has been sold in the country, according to the Petroleum Planning and Analysis Cell.