In a move that could erode Hyderabad's competitive edge in aviation it had one of the lowest value added tax (VAT) on aviation turbine fuel (ATF) at 4% the state government hiked it to 16% on Wednesday. "The hike will come into effect from Feb. 1," principal secretary (revenue) Asutosh Mishra said.

It may be recalled that the late CM Y S Rajasekhara Reddy, in a bid to attract more traffic to the just-opened GMR Group-operated Rajiv Gandhi International Airport at Shamshabad in March 2008 had announced that VAT on ATF would be 4%.

This move resulted in many airlines making Hyderabad a refuelling hub which also translated into an increase in traffic. Elsewhere in the country, the tax is an average 20%.

The hike comes as part of the state's drive to enhance various taxes to shore up its dwindling revenues. Mishra said that the hike would add approximately Rs 150 crore to the state revenue.

The AP government is facing a shortfall of over Rs 10,000 crore in revenue this financial year. Consequently, it enhanced VAT on various items from 12.5 to 14.5 per cent recently and has now hiked the tax on ATF as well.

All these measures are expected to yield an additional revenue of about Rs 6,000 crore to the state, according to official sources. On the impact on the industry, Kapil Kaul, subcontinent CEO of Centre for Asia Pacific Aviation (CAPA), an aviation research and consultancy, said: "It's a retrograde step and a disincentive to the industry.

While it may not make a huge impact on the traffic, it will act as a disincentive in the development of Hyderabad as a regional hub for which huge investments have been made. Also, this gives a feeling that governments still do not see aviation as an economic enabler."

A GMR Group spokesperson said the impact will be primarily on the airlines. "Earlier, they would go for full tank here and fly off to other destinations. That might come down beacuse of the hike in VAT." However, the exact impact even on traffic will be known only in March when the figures are compiled, he added.

The hike in ATF has been effected under section 79 (1) of the Andhra Pradesh Value Added Tax Act 2005, by amending schedule-VI of the Act as per an order issued by the principal secretary.