The move comes at a time high aviation turbine fuel (ATF) prices and a weaker rupee have kept airline finances under pressure
New Delhi: The government on Wednesday cut excise duty on jet fuel from 14% to 11% to help keep airfares under check and to give relief to airlines troubled by high fuel prices.
A notification from the finance ministry’s revenue department said the revised duty will be effective from Thursday.
The move comes at a time when high jet fuel prices and a weaker rupee have kept airline finances under pressure, with companies having limited headroom in raising fares without losing market share as the domestic aviation market is very price sensitive. Excise duty on jet fuel was increased in March 2014 from 8% to 14%.
In the case of routes covered under the government’s regional connectivity scheme, jet fuel is already taxed at a lower rate of 2% from 1 July 2017.
Rising oil price and a weaker rupee have in recent months pushed up costs for industries with high energy requirement. To give relief to consumers, the government last Thursday cut excise duties on petrol and diesel by ₹ 1.5 a litre each and asked state-run fuel retailers to absorb ₹ 1 per litre on the auto fuels.
The Modi administration, which has so far been resisting populist measures, is taking steps with consumer interest in mind in its last leg in office before national polls early next year. The government had raised excise duty on auto fuel several times over the last few years to mobilize revenue for welfare measures such as liquefied petroleum gas connections without upfront charges for the poor, village electrification and a massive health insurance scheme for the poor.
“ATF (aviation turbine fuel) represents the single largest cost element for airlines, accounting for 30-40% of their total operating expenses. As such, the profitability of airlines is significantly impacted by ATF prices, which have been subject to high volatility," ratings agency ICRA Ltd said last month. In the first half of this fiscal, jet fuel prices have surged more than 33% from a year ago because of the increase in its price in global markets and the weakening of the rupee, said ICRA. Retail prices of finished petroleum products in India are not directly linked to their local cost of production but to their international market prices.
Domestic airlines, which are rapidly expanding their capacity with large scale induction of aircraft planned over the coming months, need to keep fares low to stimulate demand, especially in new routes. This has curtailed their ability to pass on increased costs to consumers.