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ATF excise cut unlikely to give airlines relief, reduce customers' airfares

Abhishek Waghmare & Arindam Majumder/New Delhi 10 Oct 18 | 10:32 PM

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The cut in excise duty on aviation turbine fuel (ATF) will give airline operators, battling high costs in times of rising crude oil prices, only a temporary relief.

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Fliers are unlikely to see reduced airfares after the hike in basic customs duty from September 26 is factored in the ATF prices in the coming weeks.

The combined impact of higher Customs duty and reduced excise duty might cancel each other out, airline officials and experts said. The impact on government’s revenue would also negligible because of the cross incidence of two duties in opposite directions, sources said.

SpiceJet Chairman and Managing Director Ajay Singh said the real benefit will happen only if states and oil marketing companies (OMCs) follow suit and reduce the price and taxes, as it happened with petrol and diesel.

“We would request the OMCs to reduce their margin by Rs 1 and state governments to reduce taxes by an equal amount. Then, it would translate to about a 10 per cent reduction in fuel cost for airlines. That would be significant in such conditions," Singh said.

According to calculations shared by an airline, an excise cut of 3 percentage points would result in reduction of unit cost of flying a passenger per kilometre by only Rs 0.04. The unit cost for low-cost airlines ranges near Rs 1.5 as of now.

In addition to central taxes of excise and customs, the incidence of state taxes in the form of value-added tax on ATF ranges from as low as 3 per cent in some states to more than 30 per cent in some, such as Andhra Pradesh.

Unless the state value-added tax (VAT) is reduced in consonance, the reduction in ATF prices would not matter much, airline executives said.

“Thanks to a massive increase in jet fuel price, states have gained heavily from VAT, and now is the time for them to pass some benefit to the airlines which would also give a boost to air connectivity in their states," Singh added. Experts have also voiced the concern of cut in excise coming together with a hike in customs duty.

“This excise duty rate cut on ATF comes as quite a sigh of relief for the aviation industry, especially in the backdrop of the recent levy of basic customs duty on import of ATF.  The increased costs on account of basic customs duty should to an extent be offset by the excise duty rate cut," Abhishek Jain, tax partner, EY, said.

State OMCs hiked aviation turbine fuel price by 7.25 per cent in October. Currently, ATF prices are at their highest under the Narendra Modi government at Rs 74,567 per kilo-litre (kl) in Delhi. The ATF was costliest in October 2013 at Rs 77,089 per kl (Delhi).

Operating costs of airlines have risen by 20 per cent over the last fiscal year, primarily because of a 30 per cent rise in crude oil prices and 9 per cent depreciation in the rupee, CRISIL Research said in a report last week.

Globally, fuel accounts for 24.2 per cent of an airline’s cost structure. In India, it is 34 per cent, making Indian carriers particularly sensitive in this area, International Air Transport Association said earlier this month.

As product prices for petrol and diesel are benchmarked to international prices and are revised on a daily basis, the rise in crude oil prices resulted in daily upward revisions in their consumer prices.

However, ATF prices are generally revised at the beginning of every month. In the October 1 revision, ATF suppliers such as Indian Oil Corporation did not factor in the basic customs duty hike, since the new shipment of oil with hiked customs duties has not entered the refining cycle yet. 

To absorb the impact of customs and pass on the discount of excise, a mid-month revision cannot be ruled out this time.

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