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Scindia is right. ATF tax revenues of states are insignificant

Aviation minister Jyotiraditya Scindia urged states to reduce the value-added tax (VAT) on aviation turbine fuel (ATF). States have long resisted such calls.

August 27, 2021 / 10:38 AM IST

In what’s becoming an annual ritual, civil aviation minister Jyotiraditya Scindia urged states to reduce the value-added tax (VAT) on aviation turbine fuel (ATF) to a benign rate of 1-4% immediately across all airports. The VAT on ATF is as high as 30% in Gujarat, 29% in Tamil Nadu and Bihar, 28% in Karnataka and over 20% in more than a dozen other states. The VAT on the sale of ATF for flights operating under the regional connectivity scheme (RCS) is at 1% in most states.

Most states have so far resisted reducing rates on ATF; Andhra Pradesh, Kerala and Telangana are the few exceptions. Kerala last reduced VAT on ATF from 5% to 1% in August 2020 in a bid to encourage domestic air travel.

The state had in the previous years slashed the rate from 25% to 5%. Telangana cut the tax from 16% to 1% in March 2018. Andhra Pradesh was the first to drop the rate to 1% -the state did that in September 2014, within months after its bifurcation.

How ATF taxes hurt airlines

High rates of taxes on expensive ATF hurt airline companies, as fuel is a major component of their cost of operations. Extreme competitive pressures to keep fares low prevent airlines from fully passing on the higher costs to passengers and freight. As a result, India’s domestic airlines were making losses much before the pandemic upset their operations.

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It is in this context that Scindia has written to 22 states on July 25 seeking rationalisation of VAT on ATF. He had observed that such rationalisation was unlikely to hurt states, given that the collection from this tax was an insignificant proportion of their overall revenues. He had also reasoned that enhanced flight connectivity to states with lower tax rates would offset the loss of revenues.

Data on states’ revenues from VAT on ATF for the last two financial years have not been shared in the public domain yet. Data for 2018-19 published by the ministry of petroleum and natural gas show that oil companies collectively paid Rs 4,561 crore as VAT on ATF that year, which was 32% more compared to the previous year.

Which states top the collections?

Delhi topped the list with the highest collection of Rs 1,199 crore or 26% of that VAT on ATF paid by oil companies in 2018-19. Maharashtra collected Rs 860 crore or 19% of the tax paid. That is not surprising, as Delhi and Mumbai are the busiest airports in the country and the tax rate in both places was at 25%.

Karnataka collected Rs 388 crore and Tamil Nadu Rs 342 crore, as Bengaluru and Chennai airports are also among the busier ones in the country. Gujarat collected Rs 237 crore, with the highest tax rate in the country.

In terms of volume, Delhi and Maharashtra account for the highest consumption of ATF. Delhi’s consumption was estimated at 2,065 thousand million tonnes (TMT), which was equivalent to 25% of the total ATF consumption in 2018-19. Maharashtra’s share was about 20% of the total ATF consumption of 8,300 TMT that year. Foreign airlines accounted for about 22% of the consumption at the all India level.

A small pie actually

As the minister pointed out, the VAT collections on ATF are minuscule compared to the total tax revenues of individual states. In most instances, it was less than 3% of the revenues from VAT and state sales tax on select goods. The VAT collection on ATF as a proportion of states own tax revenue at the national level is a tiny fraction – just 0.4%.

Also Read: Jyotiraditya Scindia asks chief ministers of five states to strengthen aviation infrastructure

Delhi was an outlier, as 21% of its VAT/sales tax revenue came from ATF. States are allowed to levy VAT/sales tax on those items that are not in the ambit of the Goods and Services Tax (GST). Thus, petrol, diesel, natural gas, electricity and alcohol meant for human consumption attract VAT/sales tax.

The Union civil aviation ministry has been lobbying the finance ministry to include ATF in the ambit of GST, together with a full input tax credit. It had proposed GST at the rate of 18% or lower for ATF sold to larger aircraft and at 5% for sales to smaller aircraft and freighters. States are yet to agree to such a move.

The ministry had also sought a reduction in the 11% central excise duty levied on ATF to 8% for larger aircraft and 5% for smaller planes till a transition to the GST regime was made. Such reduction can also provide relief to airline companies, the civil aviation ministry has told the finance ministry.
Tina Edwin is a senior financial journalist based in New Delhi.
first published: Aug 27, 2021 10:38 am
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