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Aviation Sector Faces Cost Pressures, Seeks GST Reform
The Indian aviation industry is facing significant financial strain, made worse by volatile global oil prices and conflicts. Airlines are renewing their calls for major Goods and Services Tax (GST) reforms, especially for Aviation Turbine Fuel (ATF). Not being able to claim input tax credits on ATF taxes directly hurts airline profits. This creates an urgent need for tax adjustments that could also improve cash flow.
Jet Fuel Tax Remains Outside GST
Aviation Turbine Fuel (ATF), which makes up 35-40% of operating expenses, is currently outside the GST system. Airlines cannot claim Input Tax Credit (ITC) on central excise duty (11%) and state VAT (1% to 29%) applied to ATF. This causes a 'tax on tax' effect, resulting in large blocked tax credits that strain finances. While the GST Council has the power to recommend bringing ATF under GST, states' concerns over losing VAT revenue are the key obstacle.
Proposed Shift in Economy Class Ticket Tax
Airlines are also proposing a change for economy class air tickets. Currently taxed at 5% GST without full ITC, carriers suggest increasing the rate to 18% GST. This would help them use existing tax credits and improve cash flow, without necessarily raising the overall long-term tax burden. Premium cabins already have 18% GST with ITC available for businesses.
Seeking Relief on Other Payments
Further relief is requested for taxes paid under the Reverse Charge Mechanism (RCM). Airlines want to use ITC for GST on Maintenance, Repair, and Overhaul (MRO) services and booking software, rather than making mandatory cash payments. This would ease immediate cash flow problems for airlines with thin margins.
States' Revenue Concerns Stall ATF Reform
The main hurdle to bringing ATF under GST is the potential loss of VAT revenue for states, a significant income source. VAT rates vary widely, from 1% to as high as 29% in Tamil Nadu. This uneven tax structure creates unfair competition, pushing airlines to refuel in states with lower VAT. For example, Maharashtra might cut its VAT to 1% from 18%, costing the state ₹1,000 crore annually. Without states agreeing to give up this revenue stream, the ATF GST proposal remains stalled.
Rising Global Fuel Prices Hurt Competitiveness
Geopolitical tensions have driven crude oil prices up, pushing Brent crude over $125 a barrel and significantly impacting jet fuel costs. For Indian carriers, ATF now represents 55-60% of operating expenses, a sharp rise from the typical 30-40%. This makes Indian airlines less competitive globally, as rivals often have better protection against oil price swings. The weaker rupee also raises costs for dollar-denominated expenses like leases and maintenance. ICRA has revised its outlook on the Indian aviation industry to 'Negative' due to these pressures, projecting wider losses for FY2026.
Past Efforts to Include ATF Under GST Failed
While the constitution allows the GST Council to recommend including petroleum products under GST, past discussions have failed to reach an agreement. Government documents have noted benefits like reduced tax-on-tax effects and potentially lower airfares. However, states' differing revenue priorities have historically blocked progress.
GST Council Meeting Key for Industry Hopes
The upcoming GST Council meeting is a critical moment for these industry demands. Resolving the issue depends on broad consensus among states, particularly about their VAT revenue from ATF. While airlines seek tax reforms for efficiency, states' fiscal interests pose a significant challenge to harmonizing ATF taxation under GST. The outcome will significantly shape the financial future of the Indian aviation sector.