As crude oil prices rose, India’s airlines and even the Civil Aviation Ministry pitched for including the jet fuel – that contributes a third of a carrier’s costs – within the ambit of the goods and services tax. Such a move, according to BloombergQuint’s calculations, can help the three listed Indian airlines save at least Rs 1,100 crore in taxes a year.
But that’s assuming the overall tax rate on aviation turbine fuel for domestic flights falls from about 40 percent (including both central and state levies) now to 28 percent —the highest GST slab.
And a reduced tax rate would mean a loss of revenue for state and the central governments, which have been reluctant to forego income from levies on fuel.
It is likely that ATF will be classified in the highest bucket of 28 percent, Santosh Hiredesai, aviation analyst at SBICAP Securities, said in a report.
“Unless there is a separate rate that may be decided for petroleum and linked products,” he said.
Indian Oil Corporation Ltd, the nation’s largest fuel retailer, increased prices of ATF by 7 percent to an average of Rs 71,245 a kilo litre across India – the eleventh straight monthly hike.
The final price includes a 14 percent central excise duty and a state value-added tax that varies between 20 and 30 percent. Fuel used for international flights does not attract any taxes, while fuel used for regional and UDAN routes attract a very low central and state tax rate of close to 1-4 percent.
What that means that higher taxes impact Interglobe Aviation Ltd-operated IndiGo the most as domestic flights contribute 85 percent of India’s largest carrier’s capacity. SpiceJet Ltd, which also has 8 percent contribution from UDAN routes, and Jet Airways follow.
Capacity Deployed By Airline Companies
Blended tax rate on fuel varies depending on the capacity deployed on domestic routes. It’s lower for Jet Group and SpiceJet because of higher proportion of international and regional routes.
Fuel Cost Structure Of Aviation Companies
Rs 1,100 Crore-A-Year Saving
Assuming the highest tax rate of 28 percent, the three airlines would have saved more than Rs 1,100 crore on levies had the jet fuel been included under GST in the year ended March.
Potential Savings for Aviation Companies
Who Will Pay for the Shortfall?
Which means state and central governments would have lost an equal amount of revenue. Amber Dubey, partner and head of aerospace and defence at KPMG India, looks at it differently though.
Lower taxes would boost air traffic, compensating for the drop in tax collection, he said. India is one of the world’s fastest-growing aviation markets, with passenger traffic growing by more than 20 percent for four straight months now.
Some people talk of revenue loss to the government if ATF is brought under GST. That’s perverse logic. The objective of GST was to subsume various taxes under one umbrella and prevent tax on tax. Keeping ATF out of GST negates that objective.Amber Dubey, Head of Aerospace & Defence at KPMG India
The other way for the government to protect its revenue could be increasing GST paid by travellers on air tickets, Dubey said.
A passenger pays 5 percent tax on an economy ticket, which the government could increase to 12 percent, he said. But that would hurt Prime Minister Narendra Modi’s vision of making flying cheaper for the common man.
Moreover, profit of two of India’s largest airlines – InterGlobe Aviation Ltd. and Jet Airways Ltd – declined sharply in the quarter ended March due to higher fuel prices. High traffic growth not followed by a reasonable profit growth could backfire if an airline or two goes under, Dubey said.
(The story was first published on BloombergQuint.)
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