Reduced VAT on ATF will spur aviation sector growth, no need to wait for GST: Ministry sources

ATF is a specialised type of fuel used by aircraft.

Keeping aviation turbine fuel (ATF) outside the ambit of the Goods and Services Tax (GST) will not restrict traffic growth in the sector as 31 states and union territories have already reduced VAT on it and the five remaining ones are also likely to do so, Civil Aviation Ministry sources said.

The Union Civil Aviation Ministry has been lobbying with the Finance Ministry to bring ATF into the ambit of GST.  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 GST Council had not agreed to such a move. "We are now not worried about ATF not being brought under GST. Today 31 states (and union territories) have VAT between 1-5 percent and there are only five outlier states with 20-30 percent VAT on ATF. They will also come on board,” the source told Moneycontrol.

In 2021, 12 states had VAT rates of between 1-4 percent while 24 states charged a 20-30 percent VAT on ATF. If states do not reduce VAT, it will impact traffic due to high costs,  restricting the growth of the aviation sector, he said.

The five states and union territories that continue to levy 20-30 percent VAT on ATF include Bihar, Tamil Nadu, Delhi, West Bengal and Assam.

The VAT collections on ATF are minuscule compared to the total tax revenues of individual states. Delhi is an outlier, as 21 percent of its VAT/sales tax revenue comes from ATF.

ATF is a special type of fuel used by aircraft. GST was implemented in India in July 2017, but petroleum products, including ATF, were kept out of its purview. This means that GST is not applicable to ATF. States are allowed to levy VAT/sales tax on those items that are not in the ambit of the Goods and Services Tax. Thus, petrol, diesel, natural gas, electricity and ATF attract VAT/sales tax.

High rates of tax on expensive ATF hurt airline companies, as fuel is a major component of their cost of operations. Though, lower value-added tax (VAT) on ATF, may not impact airline fares due to high domestic demand and the constrained capacity.