The aviation ministry has called for state governments across the country to discuss on a possible mechanism to reduce the tax on aviation turbine fuel (ATF) whose price was hiked by a steep 6.9% last week.

India’s airlines, being extremely sensitive to the price of ATF, were left with no choice but to raise ticket prices on key routes by as much as 40%.

The new proposal aims to align ATF along with the declared goods category that results in a uniform, lower rate of value-added tax (VAT). The aviation ministry officials cited the example of Chhattisgarh where VAT on ATF was reduced to 4% in November 2010. “This resulted in a jump in ATF sales from 100 to 2200 kilolitre per month. The total passenger movement increased from 533,000 in 2010-11 to 8,05,000 in 2011-12,”an aviation ministry official said.

Average ATF prices at Indian airports are significantly higher than those in Singapore, Hong Kong, Dubai, London or Abu Dhabi. As a result, fuel represents an average of 45% of operating costs for India’s airlines, compared to a global average of 32%.

VAT, according to the official, forms a miniscule part (0.5-2%) of a state’s total revenue when levied on ATF and its reduction “will result not only in increased uplift but better connectivity and investment for states.”

The meeting between the aviation ministry and state aviation ministers to discuss this issue is slated to happen on September 10.