Apart from custom and excise duty, airlines pay each state a value added tax ranging between 3 to 30 percent on ATF
The government's move to cut excise duty on aviation turbine fuel (ATF) from 14 to 11 percent effective October 11 is expected to provide some relief to airlines but fliers may continue to pay a high price as excise cut on ATF is unlikely to make airfares cheaper, Business Standard reported.
The impact of cut is likely to be balanced out with the higher customs duty that was announced last month. On September 29, the government had hiked custom duties on 19 items in an attempt to reduce current account deficit. The rate on ATF was increased to 5 percent from zero. As a result, the airfares went up by about 7.5 to 8 percent.
"The effective impact of the duty hike on fuel costs will be about 7.5 to 8 percent," said Mark Martin, founder and CEO of Martin Consulting, an aviation advisory and consulting firm.
Fuel makes up to as much as 40 percent of an airline's costs.
According to the report, an excise cut of 3 percentage points would result in a reduction of unit cost of flying a passenger per kilometres by only Rs 0.04. The unit cost for low-cost airlines ranges near Rs 1.5 as of now.
Industry experts have voiced concerns over a cut in excise duty coming together with a hike in customs duty, the report said.
"This excise duty rate cut on ATF comes as quite a sigh of relief for the aviation industry, especially in the backdrop of the recent levy of basic customs duty on import of ATF. The increased costs on account of basic customs duty should to an extent be offset by the excise duty rate cut," Abhishek Jain, Tax Partner at EY, told the paper.
Apart from custom and excise duty, airlines pay each state value added tax (VAT) on ATF. These taxes range from 3 percent in some states to 30 percent in states such as Andhra Pradesh. Thus, unless the states reduce VAT, any reduction in ATF prices may have little impact, airline executives told the paper."Thanks to a massive increase in jet fuel price, states have gained heavily from VAT, and now it is time for them to pass some benefits to the airlines which would also give a boost to air connectivity in their states," SpiceJet Chairman and Managing Director Ajay Singh told the paper.