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The Pros and Cons of Adding ATF to the GST Regime

Feb 21, 2022 12:09 PM 4 min read

On Sunday, Finance Minister Nirmala Sitharaman reiterated the Union Government’s support for a key demand of the aviation industry - the inclusion of aviation turbine fuel (ATF) under the GST regime.

She pointed to soaring global crude oil prices - currently hovering around $90 and anticipated to rocket to $120 in the near-term amidst rising geopolitical risks vis-a-vis Ukraine - and the beleaguered aviation sector, which is still struggling to resurface to pre-pandemic levels of growth.

Off the top, the proposition to include ATF within GST’s ambit seems like a slam dunk. It enjoys broad support across GoI ministries and all that stands in its way is the GST Council’s assent. 

Look closer, though, and complications emerge. Let’s begin at the beginning…


Ancient History

Rewind to 2017, when GST began to be implemented. This involved replacing multiple Union and State indirect taxes with a single framework. 

Initially, many States were reluctant to board the GST train because it would restrain their power to impose indirect taxes, potentially leading to a drop in revenues. To pacify their concerns, (1) a Compensation Fund composed of a cess levied on the 28% GST bucket items was created for a five-year transition period and (2) some items were exempted from the GST ambit altogether.

The latter included things like liquor, petrol, diesel, natural gas, crude oil - and ATF. The idea was that these commodities could be easily taxed, and revenues from the same have historically been central to States’ exchequers.

FYI: States procure revenue, broadly speaking, from (1) tax sources and (2) non-tax sources. The former is further divided into the States’ “own tax revenue” and their share in Union taxes. 


Struggling to Take Off

Now, coming to the aviation industry, it goes without saying that it's a critical contributor to the national economy. It also has a high output multiplier of 3.25 and an employment multiplier of 6.1.

Two things to keep in mind here: (1) ATF, which fuels aircraft, accounts for 40-45% of an airline’s operating costs, and (2) aviation is a cripplingly competitive business.

Translation: airlines were loss-making and debt-laden even before COVID-19 struck. ATF prices are dictated by global crude rates; as such, Indian airlines are helplessly bound to them. What’s more, elevated ATF prices don’t necessarily translate into hefty air tickets for Indian consumers - in the age of LCCs and ULCCs, airlines have to offer dirt-cheap tickets to stay competitive. 

Furthermore, the weak credit profiles of most Indian carriers meant they were ill-equipped and ill-prepared at the eve of the pandemic. And the coronavirus inadvertently made everything worse. Any benefits from historically low international oil prices in 2020-21 were offset by the demand dip and flying restrictions.

Fast forward to 2022, and ATF prices are now soaring. As of today, they have risen by nearly 60% YoY, confounding an industry still stifled by Omicron, travel restrictions and consumer inhibitions. “Predicament” would be an understatement.


What Does GST Have to Do With Any Of This?

As noted earlier, ATF was one of the petroleum products kept outside the GST system. What this means is that it is levied two different sets of taxes: a Value Added Tax (VAT) by States and an excise duty by the Union Government. 

The latter is currently set at 11%. As for VAT, it varies wildly by State since there is no standardisation of rates. Most have a rate above 20%. Some, like Gujarat, Tamil Nadu, Bihar, Delhi and Maharashtra, charge up to 30%. And a handful of States, like Kerala, Andhra Pradesh and Telangana, charge in the low single-digits.

Because ATF commands nearly half of airlines’ expenditures, it has been a long-standing demand of the aviation sector to bring ATF under GST so that (1) a full input tax credit can be availed and (2) a single rate would be applicable nationwide - this has been proposed to be capped at 12%. 

Basically, have a single rate across States instead of imposing a confusing double-whammy of VAT and excise duties.


Why Not Just Do It Then?

Bringing ATF under GST would require the consent of the GST Council, where State governments hold considerable sway. The Union Government has tried its luck repeatedly over recent years - in fact, it’s become something of a ritual. 

As a middle way out, GoI has proposed that States at least standardise VAT rates in the 1-4% range. The argument is that, unlike petrol or alcohol, ATF’s contribution to States’ coffers is negligible - in most cases, less than 3% of overall VAT revenues and only 0.4% as a proportion of States’  own tax revenue. What’s more, bringing down rates has been known to increase aircraft movements in states like Telangana, Andhra Pradesh, Meghalaya, Sikkim and Nagaland. As such, any revenue losses could easily be offset by a jump in tourism revenues.  

So far, though, there have been no takers for the idea. States have generally been reluctant to give GoI more leeway in tax collections. Partly because their own coffers aren’t exactly overflowing presently, thanks to the pandemic and lockdowns, but also because the Union and State governments don't exactly see eye-to-eye on taxation - among other things. 

To be fair, GoI doesn’t exactly have its hands clean here. Case in point: the GST compensation issue is still fresh in everyone’s minds. As is the ongoing scuffle over MGNREGA funds. Or the farm laws, which were passed by Parliament sans discussions or consultations. Or the Prime Minister blaming the States for the Second Wave and vaccination missteps in the early stages, while absolving the Union Government of any wrongdoing. Basically, Indian federalism has seen better days.

Moreover, States may be loath to give away whatever remaining sovereign taxation powers they have. The GST transition period is scheduled to end in June. With the Compensation slated to end soon, States are more uncompromising than ever before.


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