Why There is a Case to Include Aviation Turbine Fuel (ATF) under GST?


Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:01:33+05:30

As Indian aviation companies struggle under mounting losses and a lag effect of the pandemic, the old debate of including fuel under GST is back on the table. In fact, the Finance Minister, Nirmala Sitharaman, hinted that the GST Council planned to take up the issue of inclusion of ATF (aviation turbine fuel) and natural gas under the ambit of GST in its forthcoming GST Council meeting. 

Rising crude poses a major problem

In the last one year, the price of crude has gone up sharply by nearly 77% on a YoY basis. In fact, if you even take a much shorter time frame since mid-December 2021, the price of crude has risen from $74/bbl to $94/bbl, a spike of 27% in 2 months. With ATF prices linked to the underlying crude basket, the pressure on airlines is imaginable. Just look at the ATF pricing table of IOCL below to get a picture.


Price (Rs/KL) for Domestic Airlines on Domestic routes

Price (Rs/KL) for Domestic Airlines on International routes


Rs.86,038 / KL

Rs.65,067 / KL


Rs.90,407 / KL

Rs.67,967 / KL


Rs.84,506 / KL

Rs.64,546 / KL


Rs.88,746 / KL

Rs.64,570 / KL


On an average, domestic airlines plying on domestic routes pay 32-35% more than domestic airlines plying on international routes. What’s more, the international prices of ATFs applicable to international airlines is another 30% lower than the domestic airlines flying on international routes. Effectively, the airlines plying on domestic routes pay nearly 70% more than what international flag carriers are paying.

This problem gets accentuated in the light of the pandemic when most airlines had to fly at almost uneconomical capacity. Aviation is an industry where airlines can be profitable if planes fly full with minimum turnaround time. That is when the airlines have a positive flying spread. Positive flying spread in financial terms is defined as the excess of the Revenue per average seat kilometre over the Cost per average seat kilometre (RASK-CASK).

Why GST on Petrol and Diesel is not feasible?

There is a reason why the debate is only about shifting ATF and natural gas to GST regime. When the GST regime was initiated in July 2017 by subsuming a number of central and state level taxes, oil was kept out of the ambit of GST. The reason was simple. For the centre and the states, the contribution of levies on petrol and diesel is huge. Here are some important data points to underline this point.

Check - ATF May Come Under the Ambit of GST says FM

1) For FY21, the central government earned Rs.419,884 crore from the taxes on oil of which 89% came from excise duties on petrol and diesel. The tax collections of the central government from oil products has increased more than 3-fold from Rs.126,025 crore in FY15 to Rs.419,884 in FY21. Based on the H1-FY22 data, the centre should end with similar revenues for FY22 also.

2) Let us now turn to how much the states are earning from oil. For FY21, all the state governments combined earned Rs.217,271 crore from taxes on oil of which 93% came from sales tax / VAT on POL (petroleum/oil/lubricants) products. The tax collections of all state governments from oil products has increased by 35% from Rs.160,526 crore in FY15 to Rs.217,271 in FY21. Based on the first half of FY22 data, the states should end FY22 with combined revenues 23% higher than FY21.

With the kind of lucrative revenue source that oil provides to the centre and the states, neither wants to risk bringing the entire oil basket under GST. At least, petrol and diesel are too revenue-critical for the centre and the states to change the current duty structure.

There is a case for including ATF under GST

CII has rightly pointed out that bringing ATF under GST would provide big relief and also would make any significant revenue dent for the centre or states. Firstly, the inclusion under GST should enable full input tax credit (ITC) on all goods and services pertaining to ATF. Currently, while the central excise on ATF is 11%, VAT rates vary from state to state; ranging between 0% and 30%. 

Indirect tax experts opine that while ATF under GST would impact a state revenues, the combined revenue impact on all states would be less than Rs.2,500 crore. That can be absorbed and even offset by the economic benefits of more flights. That is why the Civil Aviation Ministry has written to all state governments to reduce VAT / Sales tax on ATF to the range of 1% to 4% at all airports with immediate effect.

It has been empirically observed that when state level duties are cut, it results in a sharp increase in traffic at airports. This was observed in the case of two specific airports where the state government dropped the ATF tax.

a) After the Kerala government reduced VAT on ATF from 25% to 1%, the number of aircraft movements at Thiruvananthapuram airport increased by 9.48% from 21,516 flights to 23,566 flights over a span of 6 months.

b) When Telangana government reduced VAT on ATF from 16% to 1%, the number of aircraft movements at Hyderabad airport increased by 12.85% from 76,954 flights to 86,842 flights over 6 months.

However, the real impact would be felt when the states with the busiest airports like Delhi, Maharashtra, Karnataka and Tamil Nadu cut VAT on ATF. The moral of the story is that there is a strong case for inclusion of ATF under GST. It will not only come as a relief to the aviation sector but also be substantially revenue neutral to the centre and the state.

Also Read:-

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