Excise Duty Cut On Aviation Turbine Fuel To Benefit IndiGo The Most

InterGlobe Aviation Ltd.-operated IndiGo will benefit the most from the government’s move to lower excise duty on aviation turbine fuel.

Under the new tax structure, excise duty on jet fuel—which accounts for more than a third of an airline’s operating costs—will be lower at 11 percent. But the value added tax charged by states will remain the same. Fuel used for regional and UDAN routes will be charged at a lower rate, while that for international flights will not attract any taxes.

The country’s largest airline pays higher tax on fuel as it has deployed nearly 85 percent of its capacity on domestic routes. That will be followed by SpiceJet Ltd. and Jet Airways (India) Ltd.—which have comparatively higher portion of their capacity deployed on international routes.

Aviation fuel in India is the most expensive in Asia due to higher taxes. Rising global crude prices only make it costlier. That, coupled with a weakening rupee and the airlines’ inability to raise ticket prices in a highly competitive industry, have led to erosion of profit margin of Indian airlines. Even IndiGo wasn’t immune, reporting its worst profit in the quarter ended June.

Indian Oil Corporation Ltd., the nation’s largest fuel retailer, has hiked aviation turbine fuel prices by 29 percent so far this year on higher crude and depreciating rupee.

This is the second oil-related excise duty cut announced by the government this month. Earlier, it had lowered auto fuel prices by Rs 2.50 a litre. The government lowered the excise duty by Rs 1.50 a litre and asked the state-run oil retailers to cut retail prices by Re 1 a litre. Following this, several states announced lowering of value added tax on fuel.

In the quarter ended June, the three listed airlines incurred a fuel cost of Rs 1.5-1.6 per kilometre. This could have been lower by 2 percent on an average if the new rate would have been applicable then, according to BloombergQuint calculations.