India gives its airlines a breather by cutting duties on jet fuel

• The Indian government has reduced the excise duty on aviation turbine fuel from 14% to 11%, effective 11 October.
  
• The move is meant as a boost for the aviation sector, which has been struggling with high fuel prices and an inability to pass on higher costs to consumers due to heavy competition in the sector.
  
• However, the cut will be offset by the recent imposition of a basic customs duty of 5% on jet fuel as part of the government’s attempts to reduce its trade deficit.

India’s aviation sector hasn’t had an easy go of it this year. The losses have been mounting as fuel prices have shot up and the rupee has plummeted. This hasn’t been counterbalanced by an equivalent rise in airfare owing to heavy competition in the industry.

In fact, according to CAPA, a consultancy, domestic airlines are set to lose nearly $2 billion in 2018-19 owing to rising fuel costs. In response to the sector’s woes, India’s aviation ministry was said to be mulling a rescue programme for the nation’s struggling airlines by reducing the burden of aviation turbine fuel expenses as well as rupee pressures.

It seems that the first part of that package is kicking in. Yesterday, a week after aviation turbine fuel prices reached their highest level since January 2014, the revenue department of the Ministry of Finance said in a notification that the excise duty on aviation turbine fuel would be cut from 14% to 11%, effective 11 October. Aviation turbine fuel costs reportedly comprise a third of operational expenses of airlines.

The move follows a ₹2.50 per litre cut in the excise duty on retail prices of petrol and diesel on 5 October.

Aviation turbine fuel had been charged an excise duty of 8% as recently as a few years ago However, the government decided to hike the duty to 14% in 2016 as its tax revenues were declining amid a freefall in global oil prices.

While it is envisioned as a boost for the sector, the recent excise duty cut can also be seen as a ploy by the current government to curry favour ahead of important state elections in Rajasthan and Madhya Pradesh by keeping airfare at manageable levels.

However, the cut might not be as effective as intended. It will be offset by the recent imposition of a basic customs duty of 5% on aviation turbine fuel. At the end of September, the Indian government hiked import duties on 19 products in a bid to reduce its growing trade deficit. So in essence,unless state governments reduce the VAT on jet fuel, the duties will just cancel each other out, resulting in a zero-sum game.