MP: VAT reduction on aviation fuel to woo airlines proves futile
Reduction in value added tax on aviation turbine fuel, which is being hailed as the panacea for low flight connectivity in MP, has failed to have the desired effect of increasing airline connectivity in the state.bhopal Updated: Oct 04, 2014 16:38 IST
Reduction in value added tax (VAT) on aviation turbine fuel (ATF), which is being hailed as the panacea for low flight connectivity in MP, has failed to have the desired effect of increasing airline connectivity in the state.
In fact, the number of flights being operated out of Bhopal has decreased after the reduction on VAT on ATF in March earlier this year.
VAT on ATF was slashed from 23% to 4% as part of an effort to encourage airlines to refuel in Madhya Pradesh thereby being an incentive for airlines to add MP to their destination maps. Also, air ticket prices that were expected to come down after reduction on VAT on ATF have only been increasing.
Recently, Union civil aviation minister Ashok Gajapathy Raju during his visit to Bhopal had hailed the state government's decision to reduce VAT as a progressive and pro-active step that would increase flight operations from the state. However, a look at the period after which the reduction was made tells a different story.
Jet Airways, one of the two airlines that operate from Bhopal, has discontinued the flight connecting Bhopal to Raipur and Ahmedabad in the period after the reduction was announced. A flight to Hyderabad has also been discontinued. Jet Airways has also discontinued the Bhopal-Chennai and Bhopal-Kolkata flights that were being run by the airline prior to the reduction in VAT on ATF. SpiceJet also discontinued its Bhopal-Hyderabad services.
Sources told HT that a business lobby group had been making the demand for waiver on VAT on ATF for a long time arguing that lower fuel prices would encourage airlines to refuel in MP putting the state on the map for airlines.
Also, lower fuel prices was expected to reduce ticket cost which did not happen either.
Neighbouring Chattisgarh was sighted as an example of a state where the airline connectivity had almost increased 100% in six months after it reduced VAT on ATF to 6%.
Chattisgarh had a thriving industrial sector especially in the Raipur-Bhilai-Durg region that contributes to demand for seats on flights, which unfortunately Bhopal does not have.
"Cheaper ATF will encourage airlines to fly to destinations in MP but unless there is substantial passenger load they will not come here.
Flying to MP only to take advantage of fuel price cost would be a case of penny wise and pound foolish unless there is a demand for seats," said an official in the state government.
The revenue loss to the exchequer has not been substantial in the months after the reduction was announced as there are not many flights from Bhopal. However, Indore is another story. With about 15 operations in a day from the commercial capital of the state, the number of flights from the city has remained constant in the last many months. There are no signs that the reduction in VAT on ATF has prompted airlines to include Indore as a destination.