The Maharashtra government announced on Thursday that the value-added tax (Vat Tax) levied on aviation turbine fuel (ATF) will be reduced from 25% to 18%, providing relief to domestic carriers.
The new rate will be implemented in the districts of Mumbai, Pune, and Raigad, according to deputy chief minister Devendra Fadnavis’ budget speech.
Except in Mumbai and Pune, Maharashtra levies a 4% Vat tax on ATF. With 315 domestic departures per day, Mumbai Airport is India’s second busiest.
Pune has one of the top ten busiest domestic airports in India. Raigad does not have a functional airport, but the district is home to the upcoming Navi Mumbai airport.
As airlines rework their fueling uplift plans, the new rate could help them save money on fuel. However, due to slot constraints at both Mumbai and Pune airports, it is not expected to add many new flights.
High Vat Tax rates on expensive ATF hurt airlines because fuel is a major component of their operating costs. Due to intense competitive pressures to keep fares low, airlines are unable to fully pass on the higher costs to passengers and freight.
As a result, India’s domestic airlines were losing money long before the pandemic disrupted their operations. Scindia sent a letter to 22 states on July 25 asking for a reduction in VAT on ATF.
He had observed that such rationalization was unlikely to harm states because the revenue collected from this tax was a minor portion of their overall revenue.
He also reasoned that increased flight connectivity to states with lower tax rates would offset the revenue loss.
Data on state revenues from Vat Tax on ATF for the previous two fiscal years have not yet been made public.
According to data published by the Ministry of Petroleum and natural gas for 2018-19, oil companies collectively paid Rs 4,561 crore in Vat Tax on ATF that year, which was 32% more than the previous year.
Statewise Vat Tax on Jet Fuel
State Wise CollectionDelhi topped the list, collecting Rs 1,199 crore, or 26% of the Vat Tax on ATF paid by oil companies in 2018-19.
Maharashtra collected Rs 860 crore or 19% of the tax paid. That is not surprising given that Delhi and Mumbai have the busiest airports in the country, and both have a 25% tax rate.
Karnataka received Rs 388 crore and Tamil Nadu received Rs 342 crore, owing to the fact that Bengaluru and Chennai airports are among the busiest in the country.
With the highest tax rate in the country, Gujarat collected Rs 237 crore. Delhi and Maharashtra consume the most ATF in terms of volume.
The consumption in Delhi was estimated to be 2,065 thousand million tonnes (TMT), or 25% of total ATF consumption in 2018-19.
Maharashtra’s share of the total ATF consumption of 8,300 TMT that year was approximately 20%. Foreign airlines accounted for approximately 22% of total consumption.
As the minister pointed out, Vat Tax collections on ATF are insignificant in comparison to individual states’ total tax revenues.
In most cases, it was less than 3% of the revenue generated by VAT and state sales taxes on specific goods.
Vat Tax on National Level
At the national level, the Vat Tax collected on ATF is a tiny fraction – only 0.4%. Delhi was an outlier, accounting for 21% of its VAT/sales tax revenue.
States have the authority to levy VAT/sales tax on items that do not fall under the purview of the Goods and Services Tax (GST).
Thus, VAT/sales tax is levied on gasoline, diesel, natural gas, electricity, and alcoholic beverages intended for human consumption.
The Union Civil Aviation Ministry has been lobbying the Finance Ministry to include ATF in the scope of GST, along with a full input tax credit.
It had proposed a GST rate of 18% or less for ATF sold to larger aircraft and 5% for sales to smaller aircraft and freighters.
States have yet to agree to such a move. The ministry had also requested that the 11% central excise duty levied on ATF be reduced to 8% for larger planes and 5% for smaller planes until the GST regime was implemented.
According to the civil aviation ministry, such a reduction can also benefit airline companies.
Civil Aviation Minister Jyotiraditya Scindia wrote to the chief ministers of five more states on August 26 – Karnataka, Jharkhand, Goa, Gujarat, and Himachal Pradesh – seeking personal intervention in matters relating to land allocation and funding to improve aviation infrastructure, according to a press release from the central government.
The civil aviation minister requested that the chief ministers of Karnataka, Himachal Pradesh, and Gujarat deposit Rs 7.55 crore, Rs 1.44 crore, and Rs 47 lakh, respectively, with the Regional Air Connectivity Fund Trust in letters dated August 26.
Scindia has also asked these five states to expedite land acquisition to the Airports Authority of India so that expansion at airports in their respective states can begin.
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