Facing mounting financial pressure amid the ongoing West Asia conflict, rising fuel costs and continued stress on profitability, India’s airline industry has once again approached the Finance Ministry seeking relief through changes in the Goods and Services Tax (GST) framework, sources told CNBC-TV18.
The renewed demand comes at a time when the government has already acknowledged the fragile financial health of the aviation sector in recent years. During and after the pandemic, the Centre had extended support to airlines through measures including the Emergency Credit Line Guarantee Scheme (ECLGS), recognising the wider impact of the aviation sector on travel, tourism and economic activity.
Now, Sources say that “with airlines once again battling elevated operational costs due to geopolitical tensions and fuel price volatility linked to the West Asia crisis, the industry is seeking intervention from the GST Council to ease tax-related cost burdens.”
According to sources, “the government is evaluating the demands raised by the aviation industry and the issue is likely to be taken up in the next GST Council meeting”, although the date for the meeting is yet to be decided.
ATF under GST back in focus
At the centre of the industry’s demands is the long-pending proposal to bring Aviation Turbine Fuel (ATF) under the GST regime.
Currently, ATF remains outside GST and attracts central excise duty of 11% along with Value Added Tax (VAT) imposed separately by states at varying rates between 1% to 29%. Th argument put across by airlines is “because ATF is excluded from GST, airlines are unable to claim Input Tax Credit (ITC) on fuel taxes, significantly increasing operational costs,” sources say.
Adding, “airlines are not currently proposing any specific GST rate for ATF. Instead, the primary demand is to include ATF within the GST framework so that carriers can avail seamless ITC benefits and reduce the cascading effect of taxes.”
Industry experts say that ATF is one of the single-largest cost components for airlines and can account for nearly 35-40% of operating expenses depending on crude prices and currency movements.
Industry experts argue that the inability to offset fuel taxes through ITC leaves airlines with blocked credits and weakens already strained balance sheets.
Airlines seek higher GST on economy class tickets
Sources say, in another key demand, airlines have sought a revision in the GST structure applicable to economy class air travel.
Economy class tickets currently attract 5% GST without full ITC benefits. “Airlines are now seeking to increase the GST rate to 18%, arguing that a higher tax rate with full ITC availability would allow them to utilise large amounts of accumulated credits that have remained stuck for years,” sources added.
Industry players believe such a move could improve liquidity without necessarily increasing the effective tax burden in the long term, as airlines would be able to offset taxes paid across the value chain and will help in their profitability.
Demand for relief on RCM payments
The aviation sector has also sought relief in the treatment of taxes paid under the Reverse Charge Mechanism (RCM).
Sources said “airlines want GST liabilities on Maintenance, Repair and Overhaul (MRO) services, currently taxed at 5%, and airline booking software services, taxed at 18%, to be allowed through utilisation of ITC rather than mandatory cash payments.”
According to industry, the current framework creates additional cash flow stress for airlines already operating under tight margins.
Constitutional backing for ATF under GST
The proposal to include ATF under GST has constitutional backing under Article 279A, which was introduced alongside the GST framework.
The Article empowers the GST Council to recommend the date on which GST may be levied on petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel. Sources said that during earlier GST Council deliberations, it was decided that these petroleum products would remain effectively outside GST until the Council deemed it appropriate to bring them within the tax framework.
Previous Deliberations
Sources further revealed that the government had prepared a detailed agenda note for the 55th GST Council meeting examining the pros and cons of bringing ATF under GST.
According to sources familiar with the discussions, the note observed that ATF is a variant of kerosene oil and that most inputs used in the production of ATF are already covered under GST. Therefore, the note suggested that ATF could potentially be brought into the GST regime through a dedicated tax entry and separately notified rate.
The internal note also flagged the issue of tax cascading under the current structure. Sources explained that VAT is presently levied on the value of ATF inclusive of central excise duty, effectively creating a “tax on tax” structure. Additionally, manufacturers and industry participants are unable to fully avail ITC on taxes paid on production inputs, increasing the overall cost of ATF.
According to sources, the note then argued that bringing ATF under GST could help reduce cascading taxes, lower refinery and airline operating costs and potentially make air travel more affordable.
States’ revenue concerns remain the biggest hurdle
Despite repeated demands from the aviation industry, the proposal continues to face resistance due to concerns over potential revenue losses for states.
ATF-related VAT collections form an important source of revenue for many states, particularly those already facing fiscal pressures. Since VAT rates differ sharply across states, bringing ATF under GST could impact state-level tax collections. As a result, the key question remains whether states will be willing to move ahead with discussions on ATF under GST and whether a broader political consensus can be achieved within the GST Council.
The next GST Council meeting is likely to provide an indication of whether the long-pending proposal finally gathers momentum or remains under discussion without a final decision.
