The profits of most Indian carriers have been squeezed over the past year, and Jet Airways has faced a near-collapse over the past few months. A major contributor to this sorry state of affairs is the high cost of aviation turbine fuel (ATF) which airlines have not been able to pass on to customers due to stiff competition in the sector.

Fuel cost is the largest expense for the aviation sector in India, and it didn’t help that ATF prices were on a steady climb for much of the past two years. From about ₹47,000 a kilolitre in Delhi (Indian Oil prices) in July 2017, the price of ATF touched a peak of ₹76,379 a kilolitre in November 2018 — an increase of more than 60 per cent. This spike was driven by the sharp rally in crude-oil prices and the rout of the rupee last year.

Thankfully, oil prices cooled and the rupee recovered some lost ground towards the end of the year. That saw ATF price also moderate meaningfully to about ₹58,000 a kilolitre in February. The relief though was short-lived with ATF price again being hiked by a sharp 8 per cent in March to ₹62,795 a kilolitre, following an uptick in oil prices. And on April 1, there was another hike, even if modest, to ₹63,472 a kilolitre.

Things might have got worse last year had the Centre not reduced central excise duty on ATF from 14 per cent to 11 per cent in October in response to calls for help from airlines. Just a month earlier, the Centre had raised customs duty on ATF from nil to 5 per cent to control the current account deficit — this hike had increased the cost of ATF by about ₹2,000 a kilolitre. The excise duty cut in October reduced ATF price by a similar amount.

Heavy tax burden

This bad cop, good cop exercise saw the Centre back off last year. But the governments, both at the Centre and the States, generally treat petroleum products, including ATF, as cash cows, and impose heavy taxes despite repeated entreaties by airlines. For instance, when ATF prices were low, the 2016 Budget increased the excise duty on ATF from 8 per cent to 14 per cent. But when ATF prices shoot up, the duties are not rolled back with the same alacrity. State taxes on the fuel vary, going up to even 40 per cent.

Despite long-pending demands from airlines to moderate these taxes, most States generally don’t oblige meaningfully. High taxes add to the pain of rising oil prices and a weak rupee, making ATF in India among the costliest globally. Airlines in India have tried responding to the situation of high ATF prices by charging fuel surcharge on tickets and by inducting more fuel-efficient aircraft such as the Airbus A320 neo and the Boeing 737 Max — unfortunately, both these aircraft have had some major troubles, with the latter recently being grounded globally due to safety issues.

Also, there have been repeated demands by airlines to bring ATF into the Goods and Services Tax (GST) regime. Currently, ATF, along with crude oil, natural gas, petrol and diesel, is outside the GST net, and is charged Central excise duty as well as States’ sales tax/VAT. If ATF is brought under GST, the fuel’s cost could moderate, with lower tax rates and the full benefit of input tax credit. But this proposal has been met with resistance due to the major revenue loss implications for the exchequer.

Not just high excise duty, the impact of sales tax is also quite significant on ATF prices. Domestic airlines that buy the fuel in India pay sales tax and much more overall for ATF than foreign carriers that pay in dollars and are not subject to sales tax. So, at $668 a kilolitre at Delhi now, the rupee cost (at 69 to a dollar) of ATF for foreign carriers is about ₹46,000 — 27 per cent less than what domestic carriers pay.

Skewed pricing mechanism

The pricing mechanism of ATF in India is based on the import-parity mechanism. The fuel is priced as if it is imported into the country. So to the international price of ATF, notional costs such as freight, insurance and customs duty are added. Then come the marketing margins of the oil companies and taxes that add to the final price of the product. This mechanism has often been criticised.

India imports crude oil in a big way, but exports several petroleum products including ATF. So, there is an argument that ATF should ideally be priced on the basis of the cost of crude oil, plus the margins for refining and marketing. This could lead to more competition among the three public sector oil marketing companies that dominate ATF supply in the country and result in more realistic pricing. It could also help address the problem of near-same pricing by the three PSU oil marketing companies that leads to allegations of cartelisation.

While vagaries in global oil prices and currency movements cannot really be controlled, rationalisation of taxes and a more transparent pricing mechanism could reduce the ATF burden on airlines.

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