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ATF as declared good to boost travel
May, 31st 2008

Civil Aviation minister Praful Patels call to state governments to lower duties on aviation turbine fuel (ATF) at the first National Civil Aviation Conference appears to have had no impact. The central government should step in and classify ATF as a declared good (which attracts a uniform sales tax of 4%) to ensure that the aviation boom does not falter.

States sales tax on ATF range from 4%-34%. The average fuel costs are, therefore, comparatively higher for Indias domestic carriers, vis-i-vis many international airlines 36% for Ryanair against 46% for Spicejet for the quarter ended September 2007. In a extremely price-sensitive market, such cost burdens have a serious effect on demand.

The states are, however, reluctant to lower sales tax rates on ATF as they stand to lose revenue without any immediate offsetting benefit. The volume gains, if any, would occur only over a long period when smaller airports come up, regional airlines take wing and intra-state traffic increases.

In some cases, one could also argue that lower fuel taxes could help increase connectivity. But it would be difficult to sell the virtues of lower sales tax to states such as Delhi and Mumbai, which are already aviation hubs that airlines have to fly to and from. They are not going to sacrifice their revenue from sales tax on ATF in the larger national interest.

This makes ATF sales tax a good case for central intervention, something that would enable it to reconfigure the cost structure of aviation so that air travel becomes affordable for a larger section of the population. Lower fuel rates would help increases airline activity in India, which would in turn yield greater revenue to the central government, through airport charges, passenger levies and corporate taxes to name a few.

The enhanced revenue would flow back to the states through general sharing of tax revenues, compensating states partly for the loss of revenue from lower sales tax on ATF. Cheap and more efficient air travel has become absolutely necessary for improving productivity, boosting tourism and providing connectivity across country.

Small aircraft are already eligible for ATF at declared goods rate. There is no reason why this should not be extended to all aircraft types.

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