New Delhi: A ministerial panel on Tuesday announced that it would allow Indian airlines to cut costs by directly importing jet fuel, the second significant concession that loss-making and debt-ridden airlines have wrung from the government in recent months.

The panel also approved Air India Ltd’s debt restructuring plan, a critical and early step in efforts to revive the ailing state-owned airline. Both decisions are yet to be approved by the cabinet, but that’s likely to be a formality.

The decision on aviation turbine fuel (ATF) will result in Mukesh Ambani-owned Reliance Industries Ltd (RIL) become the unintended beneficiary even as analysts averred that fuel import was not a practical idea and some states opposed it.

The decisions were announced by aviation minister Ajit Singh after the meeting that was chaired by finance minister Pranab Mukherjee.

By importing jet fuel directly, airlines will avoid having to pay sales tax on it. The levy varies between 4% and 30% across states.

Even as analysts panned the move as impractical, especially because airlines do not have the requisite infrastructure, some states opposed the move.

Airline stocks touched a six-month high in response to the move. Jet Airways (India) Ltd rose 14.48% to Rs 341.20, Kingfisher Airlines Ltd gained 13.2% to Rs 29.15 and SpiceJet Ltd rose 10.98% to Rs 27.30. The benchmark index of BSE, the Sensex, fell 0.48%.

Kingfisher chairman Vijay Mallya, whose airline has been at the forefront of lobbying efforts to convince the government to allow airlines to import fuel and to also allow foreign carriers to buy into Indian ones, said the approval was a “good news indeed” and added he would “of course” use RIL’s infrastructure for supplying ATF.

“Following the permission to airlines to directly import ATF, we have been approached by airlines to provide them services for handling ATF on their behalf at the airports. The discussions are in the preliminary stage and modalities are yet to be finalized,” said a spokesperson for RIL, India’s biggest private oil refiner.

Kingfisher was the first airline to seek approval, late last year, from the government for direct import of ATF. Jet fuel accounts for 40% of an airline’s costs in India. Once jet fuel is removed from the list of items imported through government channels, airlines can directly bring it in although only state-owned refiners currently have the airport infrastructure required to fuel planes in the country.

Airlines had lobbied for this in 2008, but the move was scrapped because of “last-mile connectivity”.

Direct import of ATF could lead to savings of as much as 10% in operating costs, according to an estimate by the Federation of Indian Airlines lobby group. In the last fiscal, Indian oil companies sold 5.08 million tonnes of jet fuel, an increase of 9.7% over 2009-10.

Direct supply wouldn’t be practical, said Centre for Asia Pacific Aviation (Capa) South Asia chief executive officer (CEO) Kapil Kaul.

“This decision sends a positive signal about the government’s intent to solve industry’s structural challenges,” he said. “However, import of ATF may not be practical as there are costs, logistics and infrastructural challenges. We have open access refuelling infrastructure only at Delhi, Hyderabad and Bangalore. Oil companies have a monopoly over the rest of the infrastructure and are reluctant to share this infrastructure. There might be challenges to the availability of surplus infrastructure.”

Kaul’s views were echoed by the CEO of a government-owned oil firm, who expressed his reservations about the move. “How will they do it?” he asked.

Capa estimates that airlines will pay a 12.83% duty on the import of ATF plus additional levies. Added to this will be costs related to infrastructure and logistics.

Kaul said he expects states to levy a new entry tax on ATF to compensate for the sales tax. He added that a better solution will be to ensure a uniform 4% sales tax on ATF across states, which can be achieved once the government makes it “a declared good”. A declared good is one considered an essential raw material for a public utility that, as a result, attracts lower taxes.

“The states that will be most impacted include Maharashtra, Tamil Nadu, Andhra Pradesh and Delhi,” said a state finance minister, who did not want to be identified. “Though the central government is well within its rights to allow direct import of ATF, it will lead to a revenue loss for these states. It remains to be seen if these states will oppose the move by the central government.”

State governments were unhappy with the move, especially since the decision was being taken ahead of several assembly elections.

“We will take up this issue in the next empowered committee meeting of state finance ministers. If we cannot levy sales tax, then we can look at increasing entry tax rates,” Madhya Pradesh finance minister Raghavji (he uses one name) said. “At present, entry tax is at around 2%.”

States levy tax on the entry of specified goods into their territory. Some of the states that levy this tax include Uttar Pradesh, Karnataka, Madhya Pradesh and Rajasthan. If airlines directly import ATF, they will have to pay both customs and excise duty even though they will save on sales tax.

Air India’s debt

Air India’s debt recast plan will mean the conversion of Rs 11,000 crore of short-term loans into long-term ones and the conversion of about Rs 7,500 crore debt to government-guaranteed bonds with 8.5% interest rate. This is expected to be followed by equity infusion of about Rs 30,000 crore (by the government) over 10 years.

“The decision to convert Air India debt to government-guaranteed bonds with 8.5% interest rate and the rest of the debt to long-term debt is a less risky propositions for the banks and is a good decision. It will ensure banks avoid provisioning for such exposure,” Kaul said.

tarun.s@livemint.com