GoM to be set up for ATF pricing

The government has finally agreed to set up a Group of Ministers (GoM) for looking into the twin issues of sales tax on aviation turbine fuel (ATF) and its base price.

ATF accounts for about 40% of airlines’ operating costs in India against 20-25% in other countries, and there has been a persistent demand for ATF price reduction to bring down aviation industry losses.

The base price for ATF used in India is among the highest in the world. And end price increases further because of state-level sales tax levy, which varies from 4% (Andhra Pradesh, Rajasthan and Maharashtra except Mumbai and Pune) to 25-30% across other states.

Civil aviation minister Praful Patel made a detailed presentation on aviation sector woes to the Union Cabinet on Thursday morning, after which, it was decided to set up a GoM.

But it is still not clear who (besides Patel) will be included in this GoM, and what is its timeline to reach a decision.

Also, any lowering of base price of ATF may also lead to demands of a similar adjustment in the prices of petrol and diesel — and this could become a political hot potato. At present, ATF pricing is deregulated and benchmarked with international crude. Over the base price, another 5% customs duty, 8% excise duty, education cess and sales tax are levied.

Patel said that even a change of Rs 1,000 per kilolitre in ATF would have an impact of Rs 300 crore on the aviation sector.

Making a strong pitch for reduction in ATF prices, the minister said that the consumption of ATF has almost doubled, from 2.5 million tonnes in 2003-04 to 4.45 mt last year, and last year alone, ATF prices increased a whopping 99.6%!

The total number of passengers grew from 28.5 million in 2003-04 to 70.1 million in 2008-09, while the number of aircraft went up from 158 to 396 and the number of domestic departures per week more than doubled from 5,108 to 11,048.

Patel said that while India has now become the ninth biggest aviation market, it still is one of the least penetrated, with just 0.02 trips per capita compared to 0.1 in China and 2.2 in the US.

With a 300 million strong middle class, flying demand is expected to increase by 8.5% per annum till 2015.

The aviation sector grew 46.4% in 2006, then 32.5% in 2007. In 2008, there was a decline of 4.7%. And for January-July 2009 also, the sector contracted 4.9%.

The number of flights also fell by 12.5% or by 9,677 flights per week.

The aviation industry recorded losses of Rs 2,000 crore 2006-07. This doubled to Rs 4,000 crore in 2007-08 and is estimated to have doubled again to approximately Rs 8,000 crore in 2008-09.

Meanwhile, Patel also informed the Cabinet on Thursday about the necessity to allow Airports Authority of India (AAI) to float tax-free bonds for Rs 5,000 crore to meet its 11th Plan commitments.

Patel also spelt out the need for government support to national carrier Air India by way of an equity infusion to strengthen the carrier’s equity base from the present Rs 145 crore and to facilitate the conversion of high-cost debt into low-cost debt.