Delhi must rationalise jet fuel VAT rates
Delhi should lower VAT on ATF to stay competitive as neighbouring UP offers much lower rates
The Delhi government would do well to respond positively to the Union civil aviation ministry’s suggestion on reducing the value-added tax (VAT) it charges on aviation turbine fuel (ATF). Delhi airport saw a record 80 million passengers last year despite a 25% VAT on ATF, but this could change once the new airport in Jewar in Uttar Pradesh (UP) becomes operational. UP has said it will be charging a much lower 1%; indeed, 25 states and Union territories charge VAT between 1% and 4%.
Given the large share of fuel in an airline’s operating costs — 40-45% as per one estimate — high VAT rates such as Delhi’s will mean that airlines may choose to fly to and refuel at a National Capital Region (NCR) airport with lower rates, once such an alternative becomes available (Jewar and Hindon in the NCR are close to Delhi). If the Delhi airport becomes uncompetitive, it will be a drag not just on the investment made in the airport but also the ancillary infrastructure that has come up around it.
Bringing the VAT down to a more competitive rate — the civil aviation ministry recommended 4% — may seem a tough ask for the Delhi government. VAT and GST collections were the only components of its revenue that just about met the budgeted projections for the current fiscal, even as overall revenue collections dipped. That said, a lower VAT on ATF could be offset to a significant degree by the ensuing gains. It would lower the burden on domestic airlines, some of which are struggling to recover costs. Improved airline health and competitiveness against foreign airlines due to the elimination of the tax disadvantage will have spillover gains for Delhi in terms of jobs, sales, and a boost to tourism and hospitality. These benefits could well be reflected in the Capital’s overall economy.
