Amid ongoing geopolitical tensions in West Asia and rising fuel prices, government of Delhi and Maharashtra provided a major relief to the aviation sector. The governments have reduced the value-added tax (VAT) on aviation turbine fuel (ATF) to 7 per cent. While Delhi government has decided to reduce the VAT on ATF from the existing 25 per cent to 7 per cent, the Maharashtra has reduced it to 7 per cent from 18 per cent for a period of six months beginning May 15. As Delhi and Mumbai serve as India’s two largest aviation hubs, this move has an outsized impact on airline economics.
Both governments have implemented this tax cut on a temporary six-month basis to monitor market conditions and assess the fiscal impact (which involves a projected revenue loss of Rs 985 crore for Delhi and roughly Rs 550โ600 crore for Maharashtra).
Will the move bring relief for airlines, flyers?
This decision is expected to reduce airlines’ operating costs and provide relief to passengers.
Airlines pay VAT and central excise duty on ATF while purchasing fuel from the oil companies. As ATF accounts for nearly 40 per cent of the airlines’ total operating cost, high tax rates have a direct impact on air ticket prices and the financial health of the aviation sector.
What will be the impact of the reduction in VATย
- Airlines’ costs could fall
- Domestic flights will get relief
- Sharp increase in ticket prices can be controlled
- The airline sector will get support during the crisis
Will ticket prices actually drop?
Airlines are going through a rough phase due to Middle East tensions as they are being forced into costly detours. Soaring fuel prices have deepened this crisis. This is why industry experts are of the view that rather than dropping fares, airlines will use these savings to absorb existing losses and stabilise ticket pricing. In other words, the VAT cut will act as a cushion for airlines and stop aggressive fare hikes rather than visibly lowering current base fares.