Anurag Jain's Blog on Bangalore Events, Travel, IIM Bangalore, IIM, IIMB, Management

Wednesday, December 10, 2003

Posted 7:53 AM by Anurag

ATF: Indian Airline Operators' Burden

Continuing on yesterday's post, today lets talk about the state of Aviation Turbine Fuel in India. ATF's pricing in India has long been known to be irrational and been the subject of many aviation sector restructuring reports. The data here is mostly taken from ToI reports over the years. The essential point is to draw attention to ATF' prohibitive costs.

* The most important thing in making civil aviation affordable, as things stand today is ATF. The most important thing that keeps costs high is the domestic price of aviation turbine fuel. If there's one crucial component in making economics of an airlines work is, its Aviation fuel. More so in India: Aviation fuel costs account for nearly 30 per cent of IA's operational costs. Globally, average the ATF price is Rs 7,959 per kilolitre. In some places, fuel is even cheaper: in Singapore it costs Rs 7729 per kl, in Kuala Lumpur it costs Rs 7,659 per kl and in New York Rs 7,804 per kl. But in India, the average cost of domestic ATF is Rs 17,094 per kilolitre, more than double the global average. At these rates, fuel comprises 40 per cent of the total operating cost of local airlines. These high costs restrict competition by making small aircraft operations non-viable. Even international carriers try to minimise refuelling in India, by filling up elsewhere as much as possible. For example, one return ticket from New Delhi to Thiruvananthapuram will set you back Rs 24,000, but you could buy fly a longer way - Delhi to Colombo for example - for Rs 14,000. And the Colombo package will include lodging.

Even after deregulation, the average price of ATF for domestic flights is around Rs 19,000 per kilolitre as compared to the international price which is around Rs 9,200 per kilolitre. The domestic price is nearly double that of the global rate due to high Customs duty, which works out to 39 per cent, and huge sales tax imposed by states. In the case of domestic production, the government imposes excise levy of 16 per cent.

Apart from the taxes, the pricing policy also discriminates between international airlines and domestic carriers. While global players pay much less, domestic carriers carrying out international operations are not provided concessions on par with their counterparts from other countries.

The cost of ATF comprises about 30 per cent of total air travel cost for international and 22 per cent for domestic sectors, according to civil aviation minister Nawaz Hussain. Aviation Turbine Fuel (ATF) taxes for Indian state-owned and private airlines, affects profitability adversely. Substantial central excise and central sales tax on aviation turbine fuel impose tremendous financial burden on the carriers leading to higher passenger tariff. Because of these high taxes, it's today cheaper to fly from Delhi to Bangkok than to Port Blair. We have to correct these anomalies.

Local sales tax on ATF currently ranges between 20-39 per cent across different states, with Kerala imposing the highest tax at 39 per cent. IA and Jet have been asking for a reduction in ATF sales tax, as at present, they have to pay a tax ranging from 20-33 per cent to the state governments. And, state governments are not willing to reduce the slabs as it's a major source of revenue for them.

To reduce the ATF sales tax, the Centre will have to take it out from the states' purview and include it under declared goods category. Also, categorisation of ATF as 'declared good', as was done for ATF supplied to turboprop aircraft, needs to be done. Then the tax can be capped at a 4-5 per cent level.

However, the ministry is taking independent initiative to coax and convince state governments to lower the sales tax on ATF and has so far succeeded in Andhra Pradesh and Goa where the tax has been reduced to 4 per cent. The Andhra Pradesh government has already cut the local sales tax on ATF to 4 per cent from 22 per cent earlier and other states are expected to follow suit. The ministry had also got an assurance to this effect from the Assam government, sources said. The ATF rates in other states range from 20 to 39 per cent.

* Anamolies in domestic vs international fares

Domestic fares are at present 23-30 per cent higher than international fares for comparable time and distance. Also, one can fly almost 41 per cent longer on the international sector than domestic for the same price. A Delhi-Bangalore return flight costs as much as a Delhi-Dubai flight even though the latter takes 42 per cent more time. Also, a Delhi-Coimbatore flight costs as much as a Delhi-Bangkok flight while the latter takes 41 per cent more time, according to a report of the CII National Committee on Civil Aviation.

This cluprit being taxes, again. State governments levy sales taxes which amount to as high as 39 per cent in Kerala. Added to that was the 16 per cent excise duty and 15 per cent Inland Air Travel Tax (IATT) charged on basic airfare.

For instance, officials say, the ATF price in the international market in May was about Rs 11,000 a kilolitre, while the same was made available to foreign airlines operating out of India at Rs 13,000 (a Rs 2,000 markup placed by Indian oil companies). IA and Air India secured ATF for Rs 16,500 for its international services while the fuel was made available for domestic operations at a whopping Rs 19,500. Therefore, the tax element (post markup) on Indian soil is a clear Rs 6,500 on a kilolitre of fuel.

In a recent petition to the government, IA said instead of reducing taxes, Tamil Nadu has actually hiked it from 25.2% to 29% while Orissa revised it from 20% to 22%. Only Andhra Pradesh has been proactive in helping the aviation industry by slashing sales tax to 4%. Port Blair also does not levy any tax on the fuel. The average sales tax for domestic airlines works out to 25% for IA with the highest being levied by Gujarat at 36% and Kerala at 34%. IA wants the sales tax to be brought down to a uniform 4% by placing it as 'declared goods' under the Central Sales Tax Act. More importantly, there is no sales tax on ATF sold to foreign airlines as per ICAO Convention 1944, a benefit IA wants for its international operations in order to have a level playing field with its international competitors.

The impact of sales tax on IA annually is Rs 255 crore while the entire industry including private airlines are faced with a tax bill of Rs 475 crore. The excise duty expenditure on IA is to the tune of Rs 130 crore (Rs 250 crore on the entire sector). The impact of withdrawal of excise duty on ATF on the central government is around Rs 250 crore in a year, which is only a minuscule share of the Rs 1,00,000 crore collected in the form of taxes from oil sales. IA says despite high rate of sales by states, the collection on ATF is a negligible portion, 0.42%, of their total sales tax earning.

The sales tax wrangle has continued for the past several decades, with foreign airlines refusing to pay local levies at various airports and the states imposing a sales tax of between 20% to 39% on international carriers refuelling at their airports. The foreign airlines stopped paying the tax, citing bilateral treaties under international aviation conventions, but the burden for the past three years fell on the oil companies, Indian Oil, BPCL and HPCL, who have been paying on behalf of the airlines.

* Discrimination against domestic players

While there was no sales tax on ATF sold to foreign carriers in the country, both IA & Air-India and private players have to pay taxes on ATF for foreign operations.

* Current players bleeding

Out of the current two private national players, Jet faces an accumulated loss of Rs.279 crores (June 03) while Air Sahara does not publish its financial results since it is a closely-held company. With Indian Airlines too in the red, the market is not left with a single national player who can boast of being in the black.

The losses of Jet have only increased from Rs.21.57 crore in 1999-2000 to Rs.80.05 crore in 2000-01 and Rs.177.53 crore in 2002-03, indicating that the airline has plunged deeper into the red with increase in market share. The impression created all the while about the success of Jet has been tarnished by the losses disclosed in the information provided in response to a Parliament question.

From ET, a primer on Civil Aviation Fuels

Status

There are two types of fuels used in the aviation industry i.e. ATF and Avgas. Avgas is used in the piston engine aircrafts used by the flying schools where as ATF is used by the turbine powered aircrafts such as jets and turbo-props.

The Avgas prices in India have risen from Rs.18 per litre in January 1998 to Rs.58 per litre at present as against Rs.25 to 30 per litre in US and Australia. This has led to 150% increase in the operative cost of a flying school aircraft making the flying training in India unviable. Consequently 7 out of 13 private flying schools and 10 out of 27 government flying schools have closed their operation during the last four years.

Avgas is not produced in India and is being imported by Indian Oil Corporation. It attracts customs duty of 39.2% comprising of basic customs duty of 20% and countervailing duty of 16%. Reduction in customs duty on Avgas would resolve the problems faced by flying schools to some extent.

Annual import of Avgas is only to the tune of 3600 kilolitres, 65% of which is consumed by the Defence sector and balance by flying schools. Due to low requirements, Indian refineries do not produce Avgas. Therefore reduction of customs duty on Avgas would not affect the Indian refineries. Also the impact on revenue will be nominal because of low volume of imports.

Recommendation

Customs duty on Avgas should be reduced from 20% to 10%.

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