The Anatomy of a Fuel Bill
For any airline in India, fuel is the single largest operating expense. Aviation Turbine Fuel can account for 35% to 40% of an airline's total costs, a figure significantly higher than the global average. This high cost isn't just about the base price
of oil; it's a direct consequence of a multi-layered tax system. When geopolitical events cause global crude oil prices to spike, this burden becomes even more pronounced, as seen with recent conflicts in West Asia that disrupted supply chains and drove international jet fuel prices to record highs. In May 2026, for instance, ATF prices surged past INR 1,00,000 per kilolitre, creating an operational crisis for carriers.
A Tale of Two Taxes: Centre vs. States
The taxation of ATF in India is a dual-system issue. The Central Government levies an excise duty, which is set at 11%. However, the more complicated and variable component is the Value Added Tax (VAT) imposed by individual state governments. Because petroleum products, including ATF, are currently outside the Goods and Services Tax (GST) regime, states have the authority to set their own VAT rates. This creates a fragmented tax landscape where rates can vary dramatically. For years, VAT on ATF ranged from as low as 1% in some areas to as high as 29% in states like Tamil Nadu. This disparity encourages practices like 'fuel tankering,' where airlines fill up in states with lower taxes, distorting operational efficiency.
Recent Relief and Lingering Issues
In response to a severe cost crisis in mid-2026, which saw major carriers like Air India and IndiGo reduce flights, some key states took action. In May 2026, both Maharashtra and Delhi, home to the country's two busiest airports, slashed their high VAT rates on ATF to 7% for a six-month period. Before the cuts, Delhi charged 25% and Maharashtra 18%, making them among the most expensive states for airlines to refuel in. While this provided significant, albeit temporary, relief, the core structural problem remains. The aviation industry has long advocated for bringing ATF under the GST framework to create a uniform, rationalised tax structure across the country.
The Impact on Airlines and You
The high and variable tax structure directly impacts the financial health of airlines, which operate on notoriously thin margins. When fuel costs surge, airlines are left with difficult choices: absorb the losses, reduce flight frequencies, or pass the cost on to passengers through higher ticket prices and fuel surcharges. In April 2026, after a significant ATF price hike, major airlines were forced to raise fuel surcharges on both domestic and international routes to partially offset the increased expenditure. This makes air travel more expensive for consumers and can dampen demand, ultimately hindering the growth of one of India's most critical sectors.
The Path Forward
While temporary VAT cuts offer a lifeline, the long-term solution sought by the industry is the inclusion of ATF in the GST. This would eliminate the state-by-state variance and allow airlines to claim input tax credits, significantly lowering their effective cost base. However, this is a complex decision requiring consensus between the Centre and all states, as ATF is a key source of revenue for many. The central government also periodically reviews other levies, like the Special Additional Excise Duty (SAED) on fuel exports, to manage domestic availability and revenue, further highlighting the intricate fiscal balancing act that defines India's aviation fuel economics.
