Government Considers Reducing ATF VAT Amid West Asia-Induced Airline Crisis

Government Negotiates with Four States to Reduce VAT on Aviation Turbine Fuel

The Indian government is in active negotiations with the governments of Delhi, Tamil Nadu, West Bengal, and Maharashtra to reduce Value Added Tax (VAT) on Aviation Turbine Fuel (ATF), a move that would provide significant relief to Indian airlines. CNBC-Awaaz reported exclusively that the Civil Aviation Ministry has held separate meetings with the four states, which are identified as levying the highest VAT on ATF.

According to CNBC-Awaaz, the Civil Aviation Ministry has proposed two options to the states. The first proposal is a temporary reduction in VAT, either for three months or six months, across the state. The second proposal is more targeted, reducing VAT at specific high-traffic airports, such as Delhi's Indira Gandhi International Airport and Mumbai's Chhatrapati Shivaji Maharaj International Airport, without requiring a statewide policy change.

The negotiations are described as "very active," with the Ministry pushing both options simultaneously to maximize the chance of at least one being accepted by each state. The four states in focus levy some of the highest ATF taxes in the country, with Tamil Nadu charging 29% VAT, the highest among them, followed by Delhi at 25%, and Maharashtra at 18%.

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The urgency behind these talks stems from a fuel price shock that has no precedent in Indian aviation history. ATF prices for domestic airlines rose approximately 8.5% from April 1, taking the price in Delhi from Rs 96,638 per kilolitre to around Rs 1.04 lakh per kilolitre. This increase is significant, but far below the 115% surge that applies to international carriers, non-scheduled operators, and charter flights, where prices crossed Rs 2.07 lakh per kilolitre.

The Ministry of Petroleum, in coordination with the Civil Aviation Ministry, directed oil marketing companies to implement only a partial, staggered increase of around Rs 15 per litre for domestic scheduled carriers. The trigger for this increase was the escalation of the West Asia conflict from February 28, which disrupted global oil supply chains and sent international jet fuel prices surging by over 130% month-on-month, according to IATA's Jet Fuel Monitor. As of last week, global average jet fuel prices stood at $184.63 per barrel, though that figure represents a 6.7% week-on-week decline, the first meaningful easing since the crisis began.

ATF accounts for 30-40% of an Indian airline's total operating costs, according to ICRA. At current prices, that proportion has ballooned, and, unlike fuel costs in many other countries, India's jet fuel prices carry a heavy state-tax component that sits entirely outside the Centre's control.

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The VAT talks are part of a broader government response that has been building since early April. The Ministry of Petroleum and Natural Gas and the Civil Aviation Ministry jointly capped the domestic ATF price pass-through at 25%, meaning airlines on domestic routes absorbed the remainder rather than passing the full 115% increase to passengers. For international routes, no such cap was applied.

On April 8, Civil Aviation Minister Ram Mohan Naidu directed the Airports Economic Regulatory Authority to cut landing and parking charges at all 34 major airports under its jurisdiction by 25% for three months. The Airports Authority of India applied the same reduction at non-major airports. The government estimated total relief to airlines at approximately Rs 400 crore over the three-month window.

The fare cap on domestic routes, which had been in place as a consumer protection measure, has also been removed, giving airlines more flexibility to price tickets in line with rising costs. In response, IndiGo implemented a distance-based domestic fuel surcharge effective April 2, ranging from Rs 275 for routes under 500 kilometres to Rs 950 for routes exceeding 2,000 kilometres. International surcharges range from Rs 900 for short subcontinent hops to Rs 10,000 for flights to the UK and Europe. Air India has implemented similar adjustments.

Beyond the VAT negotiations, CNBC-Awaaz reported two additional measures currently in progress. The Civil Aviation Ministry is reviewing air service agreements with multiple countries and exploring new routing options designed to bypass Gulf and West Asian airspace. The objective is to reduce flight times and fuel burn on routes currently forced into longer paths by the regional conflict, including the closure of Pakistani airspace which has compounded costs on certain corridors.

Separately, an Emergency Credit Line Guarantee Scheme (ECLGS) facility for airlines is ready for rollout but is currently awaiting Cabinet approval. The scheme would allow carriers to access easier credit to manage the liquidity pressure created by the fuel shock.