Maharashtra jet fuel VAT cut unlikely to lower airfares

The Maharashtra government's decision to reduce value-added tax on aviation turbine fuel is unlikely to be passed on to customers due to high domestic demand and the constrained capacity of Indian airlines.

VAT on jet fuel was cut to 18 percent from 25 percent at airports in Mumbai, India’s second-biggest aviation hub, Pune and Raigad on March 9. Raigad doesn’t have a functional airport, but the upcoming Navi Mumbai airport is in the district.

Industry experts and aviation officials told Moneycontrol the reduction of VAT on ATF will help improve the profitability of flights operating from Maharashtra and boost connectivity to Pune and the upcoming Navi Mumbai airport.

“The biggest impact of the cut in tax on ATF will be seen in the boost in flights to the upcoming Navi Mumbai airport,” said a senior official from IndiGo, the country’s largest airline by market share. He added that the impact on airfares from Maharashtra will not be significant.

An official from Go First added that the reduction will boost the profitability of flights for airlines after fuel costs soared.

The reduction of VAT on ATF “will have negligible impact on airlines and it is highly unlikely that it will be passed on to customers,” said Ameya Joshi, founder of aviation blog Network Thoughts.

“Fuel costs are around 40 percent of domestic operations and this reduction will at best have an impact of 3 percent overall, which is insignificant to pass on. This will help with margins for airlines.”

Limited scope

Joshi added that lower costs may encourage airlines to start more routes, but both Mumbai and Pune are congested, with limited scope for expansion and thus it won’t spur growth.

“It will definitely help airlines make a little more money on flights,” he said.

ATF prices have surged since the outbreak of COVID-19, leaving airlines with little bandwidth to reduce ticket prices. The cost of ATF was Rs 1,06,695.61/kL in Mumbai as of March 1, 2023. A kilolitre of ATF is priced at Rs 64,529 in Mumbai as of March 2020.

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Airlines expect current airfares to be the new normal because demand continues to outstrip supply.

“Most airlines are operating with passenger load factors of 90-95 percent on metro routes at the moment. Going forward, demand will only rise in the first quarter of FY24, so airfares are unlikely to fall from current levels any time soon,” an official from Air India said. He said domestic airlines can't afford to cut airfares at current ATF price points.

Mumbai is the second-largest airport in India in terms of domestic market share after New Delhi. Both airports cater to about 30 percent of all domestic flights.

Aviation minister Jyotiraditya Scindia hailed the Maharashtra government’s decision to cut VAT.

“With this, Maharashtra joins the league of total of 19 States/UTs that have rationalised VAT rates in the last 1.5 years. Alongside enhanced connectivity for Mumbai, Pune & Raigad, this will also make travel more affordable, and boost growth," Scindia said in a post on Twitter on March 9.

The aviation industry has been requesting the Central government to bring ATF under the ambit of the goods and services tax regime for three years.

So far, Andaman & Nicobar Islands, Uttarakhand, Jammu & Kashmir, Ladakh, Tripura, Madhya Pradesh, Himachal Pradesh, Uttar Pradesh, Arunachal Pradesh, Haryana, Dadra and Nagar Haveli and Daman and Diu, Manipur, Jharkhand, Mizoram have reduced the VAT on ATF to 1-4 percent.

Gujarat has decreased the rate to 5 percent from 30 percent, Goa has brought it down to 8 percent from 18 percent, and Karnataka has reduced it to 18 percent from 28 percent.