Chidambaram’s farewell gift to Indian carriers!

Before leaving office, former finance minister (now the home minister) P. Chidambaram had announced that North Block was willing to introduce a bill in Parliament to make jet fuel a declared good, if the government could muster enough political support to see it through the legislature. On becoming a declared good, aviation turbine fuel (ATF) would attract a uniform sales tax capped at the rate of 4 per cent across all states.

Domestic carriers are reeling under losses from high fuel costs even though global crude has reversed its steep rise quite dramatically. Indian airlines, by and large, are more vulnerable to oil shocks as Indian states milk ATF, levying sale tax at rates of up to 40 per cent on domestic airline companies. The rates of the tax are ad valorem, meaning they rise progressively as the cost rises. Delhi, for instance, collected about Rs 3,300 crore in sales tax on jet fuel last in 2007-08. ATF in Delhi is 72 per cent more expensive than comparable hubs in Singapore and Dubai mainly catering to Indian passengers.

International airlines pay the tax at 4 per cent. Hard-to-trim fuel costs thus make up more than half of the cost of operations for Indian carriers, making it tough for them to cut fares, attract more fliers and hope to fly out of near-bankruptcy.

Indian airlines, including Jet Airways, are expected to end this year with combined losses of around $2 billion, almost twice as much as they lost last year. ATF in Delhi is 72 per cent more expensive than comparable hubs in Singapore and Dubai mainly catering to Indian passengers.

International airlines pay the tax at 4 per cent. Hard-to-trim fuel costs thus make up more than half of the cost of operations for Indian carriers, making it tough for them to cut fares, attract more fliers and hope to fly out of near-bankruptcy. Indian airlines, including Jet Airways, are expected to end this year with combined losses of around $2 billion, almost twice as much as they lost last year.

What are declared goods?

Decades ago, the Parliament had prepared a list of declared goods to deal with just such a problem. The list includes among other items, rice, cotton, iron, steel, LPG, oil seeds and jute. It prevents states from heavily taxing these critical raw materials for revenues. The goods in the list attract a uniform value-added tax capped at 4 per cent. Parliament had legislated the list of declared goods to prevent states from exporting taxes to other states, says Satya Poddar, Partner (Global Tax Advisory Services), E & amp;Y, India. He doesn't recall additions to the list in the last two decades.

What will making ATF a declared good do?

ATF is mostly bought and sold at airports in the metros, where states make a killing on the taxes. Last fiscal, Maharashtra, for instance, mopped up Rs 30,000 crore in total taxes. If ATF is enlisted as a declared good, the state will lose nearly Rs 900 crore, which airlines will save. Private airlines such as Liquor baron Vijay Mallya's Kingfisher and India's largest private carrier Jet Airways, have been lobbying hard with the government for a fair tax regime for ATF, which was traditionally a high-tax item owing to the categorisation of aviation as a highend service. The low-cost carrier model changed this notion forcing the Centre to rationalise taxes on the fuel earlier this year. Airlines have welcomed Chidambaram's announcement.