Explained | How can the government include ATF as a part of GST?

The Indian aviation sector is once again staring at all-time high prices of aviation turbine fuel (ATF) after prices were hiked for the ninth time on May 1 due to a surge in global energy prices.

ATF prices were hiked by 3.22 percent or Rs 3,649.13 per kl in Delhi to Rs 1,16,851.46 per kl, increasing stress on airlines as jet fuel constitutes nearly 40 percent of the operating cost of an airline

Airlines in India have to find a way around rising ATF prices even as the industry is stepping up operations to cater to rising demand after two years of the COVID-19 pandemic and fare caps imposed by the government are still in place.

While the Ministry of Civil Aviation is working with states to reduce the value-added tax (VAT) applicable on ATF, VAT rates at most major airports in India are still quite high.

For example, in Maharashtra, VAT on ATF is 25 percent in Mumbai and Pune but 5 percent at other airports. Similarly, in Tamil Nadu and Gujarat, VAT on ATF for the Trichy airport and Rajkot airports is 5 percent, but 29 percent for all other airports in the two states.

The aviation industry wants the government to include ATF under the goods and services tax (GST) to benefit from input tax credit and reduce the stress on operations.

“If ATF is included as a part of GST, airlines will enjoy the benefit of input tax credit which is currently not applicable as jet fuel is taxed under VAT. The input tax credit will bring down the stress of high ATF prices for airlines considerably,” a senior official from a domestic airline said.

The aviation ministry has also asked the finance ministry to bring ATF under the ambit of GST at an applicable rate not higher than 12 percent with a full input tax credit.

The Union government is expected to discuss this issue at the next meeting of the GST Council, finance minister Nirmala Sitharaman had said in February.

But how can the government include ATF under GST?

ATF can come under the ambit of GST only if the GST Council, which is made up of all state finance ministers, agrees.

However, ATF is a product that is of interest to only 15 states because not every state has the infrastructure to carry out aircraft refueling at airports. And ATF sales can only happen at airports with refueling facilities.

Of the 15 states that have such infrastructure, seven—Karnataka, Delhi, Maharashtra, Kerala, West Bengal, Tamil Nadu, and Gujarat—account for the bulk of the demand for ATF in India, as they have multiple airports with refueling infrastructure and handle the most number of domestic and international flights operating in the country.

If ATF is included under GST, these seven states will have to stop charging VAT on jet fuel and the central government will have to stop charging excise duty on ATF. So in order for jet fuel to be included under GST, these seven key states and the Union government will have to come to an understanding.

Methodology to include ATF under GST

Senior government officials said that an Integrated GST model is being discussed in order to include jet fuel under GST.

“The fitment committee is expected to recommend an IGST model to include ATF under GST,” a senior government official said.

IGST is a tax under the GST regime that is applied on the interstate (between two states) supply of goods and/or services as well as on imports and exports.

The fitment committee comprises officers from various states and makes suggestions on tax rate changes to the GST Council.

“Output tax on the sale of tickets both on business and economy air passenger transport services may be levied at a uniform rate of 12 percent. Output tax on air cargo transport and ancillary services such as catering, premium services, and services on add-ons may be levied at 12 percent. Airlines may be allowed a full input tax credit for GST paid on all goods and services,” another government official said.

Advantages of including ATF under GST

While the seven states meet most of India’s ATF demand, some domestic airlines in the last two years have started operating flights to alternative airports with a lower VAT rate to carry out refueling, multiple markets experts said.

“Most domestic flights operating between Delhi and Kerala have a stopover at airports in Tamil Nadu in order to carry out refueling as the VAT rate in Delhi and Kerala is much higher when compared to Tamil Nadu,” a tax expert from Deloitte said. He added that this has led to revenue erosion from VAT for some states.

“If jet fuel is included under GST, airlines can start operating more direct domestic flights and won’t have to consider alternative routes in order to reduce the burden of high jet fuel,” another senior executive from a domestic airline said.

He added that the inclusion of ATF under GST will also prompt more states to set up refueling infrastructure.

Similarly, multiple market experts said that If IGST is imposed on ATF, states that handle most of India’s ATF refueling will not suffer an erosion of revenue collection from tax because airlines will stop looking for alternative routes to carry out refueling.


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