New Delhi: Recent moves by the governments of Rajasthan and Andhra Pradesh to reduce sales tax on aviation turbine fuel (ATF) to 4% from 20%, which could potentially save up to 10% of operating costs for airlines, could put pressure on the governments of Delhi, Maharashtra and Karnataka to match them or risk seeing a sharp decline in the number of flights that refuel in cities in these three states.

The airports in New Delhi and Mumbai account for not just half the passenger traffic in the country, but also 40% of ATF consumed in India. Maharashtra, which levies a concessional sales tax on ATF at all its airports except Mumbai and Pune, has already indicated it is considering lowering the 25% sales tax in Mumbai and Pune to 4%.

Epensive commodity: Airports in New Delhi and Mumbai account for 40% of the aviation turbine fuel consumed in the country. (Photo: Matthew Staver/Bloomberg)

The only states that levy a 4% tax on ATF are Rajasthan, Kerala and Andhra Pradesh, which lowered the sales tax shortly before the new Rajiv Gandhi International Airport at Hyderabad was opened for commercial use last month.

Rajasthan’s decision, the latest of the three, comes after discussions between senior officials of the state government and the Union civil aviation ministry, which has been seeking lower state taxes on ATF— of up to 30%—on behalf of domestic airlines that are reeling under steep losses. As ATF prices have soared 75% since early 2005, analysts reckon the cost of the fuel has climbed to as much as 60% of an airline’s operating cost, up from 40% earlier.

ATF prices in India are set primarily by state-run oil companies based on global crude prices, but high state and other taxes make the commodity even more expensive.

The decision by the Rajasthan administration, however, comes with some riders. The relief will be applicable only for airlines setting up a hub in the state, flying clubs for training or connecting new destinations.

“These are the three kinds of people who will be entitled to have the exemption," said Subhash Chandra Garg, principal secretary (finance) of the Rajasthan government.

For airlines to qualify under the hub classification, they would need to have an overnight parking in the state and have flights originate from there. “We want specific kind of benefits to accrue. Either you (airlines) generate more employment, training or something new like routes," Garg said of the decision that became effective 1 April.

The tax incentive may encourage players with smaller aircraft to connect the state better. Regional carrier MDLR Airlines Pvt. Ltd said it was ready to connect new routes and park planes in the state. “But they do not have apron to park in Jaipur. The night-landing facility in Udaipur is only half operational. If all this is taken care of, we would be eager to go there," said Kaustav Dhar, executive director (commercial and marketing) of the Gurgaon-based airline.

For large national carriers, however, the new announcement will mean little. “It just sets the precedent for other states to follow soon, but will it make us fly to smaller places? Probably not," said Samyukth Sridharan, chief commercial officer at low-cost carrier SpiceJet Ltd. But “if (the Delhi state) follows with a similar reduction, (it) will have a huge impact", he said.