Airlines bet high on ATF futures as MCX tweaks trading norms

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New Delhi, Sep 5: excise duty at 8 %, education cess at 3% on excise duty and sales tax of 30-40% depending on the state.

The petroleum and civil aviation ministries have been lobbying for the government to rationalise sales tax on ATF. In November 2007, civil aviation minister Praful Patel took up the matter with state chief ministers, before they finalised their state budgets for 2008-09. Consequently, Andhra Pradesh and Kerala reduced sales tax on ATF to 4%, Maharashtra reduced the sales tax to 4% for airports other than Mumbai and Pune, while Rajasthan slashed sales tax on ATF to 4% under certain conditions. Revenue from sales tax on ATF contributes only 0.5% to 2% of the total sales tax collection by the states, but growth in real terms has been significant and is much more than other petroleum products due to the high growth being experienced by the aviation sector.

Sales tax is levied on the base price fixed by oil companies, which is linked to international crude prices. These have seen a phenomenal rise recently creating a double jeopardy situation for airlines. Comparative data collected from Maharashtra, Delhi, Karnataka and West Bengal shows a sharp increase in revenue from sales tax of ATF as compared to HSD (high speed diesel).

The civil aviation ministry has also approached the Empowered Committee of State Finance Ministers to consider the issue. The committee was asked to consider the negligible contribution to overall sales tax collection and that impact of reduction in sales tax rates for ATF would be marginal. They were also told that any losses, however marginal, would be made up with the expected rapid growth in the sector. According to Patel, once the airlines are financially stable, investment in the sector would grow, new players would emerge and competition would increase leading to better connectivity.

High ATF prices are forcing many airlines to withdraw flights from low-yield routes, leading to low connectivity apart from adverse effects on trade, commerce, tourism, economic growth and reduction in employment opportunities. As per Federation of Indian Airlines (FIA) estimate, a reduction of 60% in ATF price to bring it closer to international benchmarks can lower airline operational losses by 25%. A reduction of Rs 1000/kl in costs translates a saving of Rs 300 crore for the sector.