Delhi Warned: Slash VAT on ATF to Avoid Flight Diversion Risks

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Delhi Warned: Slash VAT on ATF to Avoid Flight Diversion Risks

The Indian government has issued a stark warning to the Delhi administration: reduce the Value-Added Tax (VAT) on Aviation Turbine Fuel (ATF) from 25% to 4%, or risk losing significant air traffic to neighboring states. This directive comes as part of a broader effort to enhance competitiveness in India's aviation sector, particularly in light of emerging airports like Noida's Jewar Airport, which are offering more favorable conditions for airlines.

The VAT Conundrum

ATF is a crucial component of airline operating costs, accounting for a substantial portion of their expenses. High VAT rates, such as Delhi's 25%, significantly increase these costs, making Delhi less appealing to airlines compared to regions with lower VATs, such as Uttar Pradesh, where VAT has been reduced to 1% for the upcoming Noida Airport[1][2].

Impact on Air Travel

Competitive Disadvantage: Delhi's high VAT on ATF makes it less attractive to airlines, potentially leading to flight diversions to cities with lower operational costs. This could jeopardize Delhi's status as a major aviation hub[1][3].
Economic Implications: Lower VAT rates in neighboring states could shift air traffic away from Delhi, affecting not only the aviation sector but also local businesses reliant on tourism and travel[2][3].
Employment and Tourism: High VATs indirectly impact employment and tourism by making air travel more expensive, thereby reducing passenger demand and affecting associated industries[2].

The Government's Appeal

Civil Aviation Minister Ram Mohan Naidu emphasized the need for VAT rationalization in a letter to Delhi Chief Minister Rekha Gupta. The minister highlighted that civil aviation is highly price-sensitive, and reducing VAT would align Delhi with other states where ATF is taxed at between 1% and 4%[1][2]. This move would promote competitiveness and support economic growth by stimulating air travel and connectivity.

Emerging Challenges and Opportunities

Noida Airport: A Game Changer

Operational Advantage: Noida's upcoming airport is poised to become a major hub with a significantly lower VAT on ATF. This could lure airlines away from Delhi, leveraging cost advantages to attract more passengers[1][3].
Economic Implications for Delhi: If airlines shift operations to Noida, Delhi could experience a decline in air traffic, impacting its economy and reducing government revenue from fuel sales[2][3].

GST Framework for ATF

The Ministry of Civil Aviation has been advocating for including ATF under the Goods and Services Tax (GST) framework to allow airlines to claim input tax credits, thereby reducing their operational costs. However, the GST Council has not supported this proposal yet[1][4]. In the absence of GST integration, lowering VAT is seen as a viable alternative to maintain competitiveness.

Industry Perspectives and Concerns

Industry experts, including aviation consultants and trade organizations like the Chamber of Trade and Industry (CTI), have echoed these concerns. They argue that a high VAT rate in Delhi could lead to passenger shifts and make airfares from Delhi less competitive compared to airports with lower VAT rates[3][5].

Key Concerns Raised:

Passenger Impact: Even if VAT is reduced, airlines might not pass the savings on to passengers due to rising operational costs and a weakening rupee[2][3].
Competition with Neighboring States: Lower VAT in neighboring states like Uttar Pradesh creates an uneven playing field for Delhi, potentially diverting air traffic away[1][3].

Conclusion

Delhi faces a crucial moment in its aviation history. To retain its position as a significant aviation hub, immediate action is necessary to revamp its tax policies regarding ATF. Reducing VAT on ATF could not only preserve existing air traffic but also attract new airlines, fostering economic growth and enhancing connectivity. In the face of rising competition from emerging airports in neighboring regions, Delhi must respond swiftly to remain competitive in the dynamic aviation landscape.

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