India’s civil aviation sector has, for several decades, operated under a tax structure that makes aviation turbine fuel far more expensive than in comparable markets. ATF is the largest cost input for Indian airlines, typically accounting for 40 to 50 percent of total operating expenditure, roughly double the global industry average of about 25 percent [1].
That gap does not arise from crude prices or geography. It is a product of a layered domestic tax regime: central excise duties, state-level VAT, ATF’s exclusion from the Goods and Services Tax framework, and the denial of input tax credits that would otherwise reduce cascading costs.
The structural flaws in ATF taxation became starkly visible in early 2026. Geopolitical shocks, airspace restrictions, and currency depreciation converged, producing what can fairly be described as the worst operational cost crisis in recent Indian aviation history. ATF prices at major airports nearly doubled in roughly ten weeks. Fuel’s share of carrier operating costs tracked toward 60 percent on domestic routes.
India’s two largest airlines announced material capacity reductions. Between March and June 2026, the central government and several states rolled out a sequence of fiscal and regulatory interventions[2]. This article examines the tax structure that created the underlying vulnerability, the government’s response to the acute crisis, and how far those measures address the root problem.
The Structure of ATF Taxation in India
Central Excise and the UDAN Concession
ATF attracts an 11 percent central excise duty for commercial scheduled domestic operations. Airports designated under the UDAN regional connectivity scheme receive a concessional rate of 2 percent[3]. The tax rates do not vary by location as they are fixed at the central level. The UDAN concession is made to direct the carrier traffic towards smaller airports, but it has a limited scope, and it does not alter the rate at major hubs where the bulk of fuel uplift occurs.
State VAT and the Absence of Coordination
Above the central levy sits a patchwork of state VAT rates that vary sharply. Before the emergency reductions of 2026, VAT on ATF ranged from 1 percent at UDAN airports and in several Northeastern states to 29 percent in Tamil Nadu, with Delhi and Kolkata at 25 percent and Maharashtra at 18 percent[4]. Each of these rated are fixed at an independent level by the states, and there exists no coordination between them; this results in significant price differences across airports that airlines must incorporate in their decisions, such as aircraft basing, refuelling strategies, etc.
The consequences are not merely administrative. A carrier departing Delhi, where VAT stood at 25 percent before 2026, faced a materially different fuel cost structure from one operating off a low-VAT UDAN airport. Routes viable from the latter may be unviable from the former. The Federation of Indian Airlines documented in the early 2000s that domestic ATF prices ran 60-80 % above international benchmarks, a differential that stemmed largely from this layered structure[5]. The blended effective tax incidence at major metropolitan airports has more recently been estimated at 25 to 27 percent[6].
The GST Exclusion and Cascading Tax Burden
In 2017, when GST was initially introduced, five petroleum products were excluded from it, namely crude oil, natural gas, petrol, diesel, and ATF; it was said that such exclusion would be reversed upon the GST Council reaching consensus on applicable rates
[7], which has failed to happen. The ATF continues to remain outside the GST net.
The exclusion generates a cascading burden. VAT is levied on ATF’s full transaction value, which already incorporates excise duty, meaning carriers pay tax on a tax-inclusive price
[8]. Oil marketing companies producing ATF and airlines purchasing it cannot claim input tax credits on GST paid at upstream stages of the supply chain. Every link in that chain absorbs a cost that cannot be recovered downstream, and those costs ultimately surface in the price of ATF at uplift[9]. The blocked credits also distort investment by raising the effective cost of capital for aviation infrastructure and equipment.
Airline Operating Costs: India vs. the Global Norm
Fuel’s disproportionate weight in Indian airline cost structures becomes clear against the global industry baseline:
| Cost Component | India (%) | Global (%) |
|---|---|---|
| Aviation Turbine Fuel | 40 – 50 | ~25 |
| Aircraft Lease and Ownership | 10 – 14 | 12 – 16 |
| Labour | 8 – 12 | 20 – 25 |
| Maintenance, Repair, and Overhaul | 6 – 9 | 8 – 12 |
| Airport and Navigation Charges | 7 – 10 | 6 – 9 |
| Sales, Distribution, and Marketing | 4 – 6 | 4 – 7 |
| Administration and Overheads | 5 – 8 | 5 – 8 |
Fuel at 40 to 50 percent is roughly double the global norm, a consequence of ATF’s elevated tax burden rather than any deficiency in aircraft efficiency or route density. Indian carriers do enjoy a labour cost advantage (8–12% versus 20–25% globally), but that advantage does not come close to offsetting the fuel premium. During the peak of the 2026 crisis, fuel’s share on domestic routes tracked toward 60 percent. Here, running the airlines profitably would be unsustainable without the increase of fare prices to suppress demand.
The Precipitating Crisis of 2026
Three compounding developments triggered the 2026 ATF price shock.
First, on 28 February 2026, military action in the Persian Gulf prompted Iranian retaliation and widespread disruption to regional energy supply chains. International crude prices, which had been trading near $73 per barrel, crossed $100 within days[10]. ATF pricing follows the Import Parity Price, which is the total delivered cost of purchasing a good from a foreign market, which serves as an alternative to producing it domestically, so domestic prices rose rapidly[11].
Second, Pakistan closed its airspace to Indian carriers, a development unrelated to the Persian Gulf conflict but coincident with it. Flights to Europe, North America, and Central Asia were rerouted, adding several hours of flight time per sector and increasing fuel burn significantly per operation[12]. Air India, which operates the most extensive long-haul international network among Indian carriers, incurred a particularly steep cost increase.
Third, the rupee depreciated against the dollar, amplifying the domestic currency cost of imported crude. By April 2026, ATF at Delhi’s Indira Gandhi International Airport was priced at approximately ₹1,04,927 per kilolitre, against ₹96,638 the prior month[13]. Fuel’s share of domestic carrier operating costs, ordinarily around 40 percent, was tracking toward 60 percent[14]. Air India announced a reduction of up to 22 percent in domestic flight frequencies; IndiGo disclosed a 5 to 7 percent reduction in domestic capacity and a 17 percent reduction in international capacity[15].
The Government’s Response: A Layered Sequence of Interventions
Export Duty on ATF
On 27 March 2026, the Ministry of Petroleum imposed export duties on ATF and diesel to deter oil marketing companies from diverting refinery output to higher-priced international markets[16]. The initial ATF export duty was set at ₹29.5 per litre. It was raised to ₹42 per litre on 11 April as conditions deteriorated further[17]. then reduced to ₹9.5 per litre effective 1 June 2026 as international crude prices showed partial stabilisation[18]. The levy was designed to be reviewed fortnightly based on international crack spreads, reflecting an intention that it function as a dynamic supply-side instrument rather than a fixed revenue measure.
Monthly Price Increase Cap
From 1 April 2026, the government capped monthly ATF price hikes for domestic scheduled carriers at 25% [19]. By that date, international ATF prices had already jumped more than 100% compared with pre-crisis levels. OMCs had to absorb the gap between the capped domestic price and the actual Import Parity Price. That was a real cost for them, assumed to be backed by implicit government support. Civil Aviation Minister Ram Mohan Naidu called the move “pragmatic and forward-looking,” and major airlines publicly welcomed it as a stabilising step.
The Price Stabilisation Fund
The Union Cabinet formally approved the creation of a Price Stabilisation Fund on 3 June 2026, providing a corpus of ₹10,000 crore as an interest-free advance to participating OMCs[20]. Under the scheme, OMCs supply ATF to scheduled Indian carriers at a stabilised benchmark price; when the Import Parity Price exceeds that benchmark, the fund compensates the shortfall. The arrangement is operative for up to 36 months, subject to annual review, and incorporates a true-up mechanism to recover the corpus from OMCs as international prices normalise. Participating carriers must source ATF exclusively from OMCs for the duration of their participation, a quid pro quo that gives the government oversight of procurement while extending price predictability to airlines.
Airport Infrastructure Relief
Airports Economic Regulatory Authority, on 9th April 2026, reduced landing and parking fees by 25% for domestic flights for three months[21]. The quantum of relief was smaller than what fuel measures offered, yet it helped airlines facing high costs and capacity cuts at the same time.
State-Level VAT Reductions
Delhi and Maharashtra made the biggest state moves, with Delhi lowering ATF VAT from 25% to 7% for six months, and Maharashtra cutting Mumbai’s rate from 18% to 7%, valid through 14 November 2026 [22]. Indira Gandhi International Airport handled close to 80 million passengers in 2024–25; Chhatrapati Shivaji Maharaj International Airport recorded 55.5 million passengers and over 331,000 aircraft movements in 2025[23]. At such large airports, dropping VAT by 11 to 18 percentage points gives airlines real savings per kilogram. The Union Civil Aviation Minister urged Congress-ruled states such as Karnataka, Kerala, and Telangana to follow the move.
Union Budget 2026–27 Measures
The Union Budget for 2026–27, finalised before the crisis escalated, included the removal of customs duties on aircraft components, directed primarily at reducing maintenance costs and improving fleet expansion economics rather than the acute fuel cost problem[24]. It nonetheless forms part of a consistent pattern of central government willingness to deploy the fiscal toolkit across multiple levers in support of aviation sector cost reduction.
What Remains Unresolved: The Case for GST Inclusion
The March–June 2026 measures are a solid response to the crisis. Airlines with large capacity in Delhi and Mumbai will gain real per-kilolitre savings from the VAT cuts. The Price Stabilisation Fund, if run well, gives a strong buffer against further international price spikes. India carried over 167 million domestic passengers in 2025. The need to keep airfares stable at that scale is clear in how broadly the government acted.
The main problem is that every part of the package is temporary and can be undone. Delhi and Maharashtra’s VAT cuts end in November 2026. The government itself said the price cap is not sustainable for OMCs in the long run[25]. The ₹10,000 crore fund is meant to be recovered when global prices normalise. None of these steps changes the tax system that the 2026 crisis exposed.
That system hinges on ATF still being outside GST. The exclusion creates cascading taxes, blocks input tax credits across the supply chain, and causes state-by-state price gaps that skew airline route and deployment choices. In January 2025, Union Minister Hardeep Singh Puri said ATF would likely come under GST “sooner rather than later.” The Principal Adviser to the PMO confirmed active work on the issue in the same fiscal year[26]. As of now, the GST Council has not acted. State revenue worries, especially from states that historically charged the highest ATF VAT rates, remain the key obstacle.
The economic argument for inclusion is clear. If ATF joined GST at 18% with full input tax credit, analysts estimate domestic carriers could cut total fuel costs by 7 to 9 percentage points[27]. The reform would also remove geographic price distortions that force airlines to pick routes based on state VAT schedules instead of passenger demand. That misallocation hurts connectivity, especially at Tier II and III airports.
Delhi and Maharashtra dropping VAT from 25% and 18% to 7% shows that the old rates were not economically viable. An airline planning a five-year fleet or long-haul route cannot do so rationally when VAT can change every six months. Conditions for lasting reform are better than in recent years: states have shown willingness to cut rates, the Centre is engaged at the top, and the crisis made the cost of inaction plain. Whether the GST Council acts remains the central unanswered question for Indian aviation.
Conclusion
ATF taxation in India sits at the crossroads of two hard realities: states depend on petroleum VAT for revenue, and a patchwork of uncoordinated levies pushes up costs for a nationally vital industry. The 2026 crisis did not create this tension. It laid out the consequences with rare clarity. Export duties, a 25% monthly price cap, a ₹10,000 crore Price Stabilisation Fund, VAT cuts at Delhi and Mumbai, and lower aeronautical charges form a serious short-term response.
However, these measures taken are steps in the direction of crisis management, and not structural reforms. The fund set up will be recovered; the VAT cuts end in November. The root issue remains: ATF is still outside GST. Without GST inclusion, the cascading tax burden continues, input credits stay blocked, and price gaps across states keep distorting airline decisions
State revenue concerns, particularly from high-VAT states, keep the GST Council from acting. But the crisis made it clear what happens when reform stalls. The situation is more favourable than it has been in years. The window for reform is open. GST inclusion, the only move that would change the conditions that made aviation so vulnerable in 2026, is still pending with the GST Council. If the Council acts, a future shock may hit a sector in better shape. If it does not, the sector will face the next shock in much the same position as today.
Businesses in the aviation, energy, and logistics sectors navigating excise duty assessments, VAT disputes, or GST classification questions arising from this layered indirect tax regime can find more on J.P. Associates’ indirect taxation and pre-GST advisory practice.
Author Details: Kanak Sharma, 3rd Year Student of Law at Rajiv Gandhi National University of Law
[1]HappyFares, Why Are Flights So Expensive in India 2026? ATF, Taxes & Competition Explained, https://www.happyfares.in/news/why-flights-expensive-india-2026 (May 30, 2026).
[2]Press Info. Bureau, Ministry of Civil Aviation, Cabinet Approves Price Stabilization Fund for Scheduled Indian Airlines towards ATF Pricing, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2268337 (June 3, 2026) [hereinafter PIB Price Stabilisation Fund].
[3]A2Z Taxcorp LLP, ATF Likely to Be Included in GST Soon, Says Union Minister Hardeep Singh Puri, https://a2ztaxcorp.net/atf-likely-to-be-included-in-gst-soon-says-union-minister-hardeep-singh-puri/ (Jan. 26, 2025) [hereinafter A2Z Taxcorp].
[4]Id. (documenting VAT rates at Kolkata 25%, Chennai 29%, Delhi 25%, and Mumbai 18% before the 2026 reductions, alongside rates as low as 1–4% at UDAN airports).
[5]Federation of Indian Airlines, Fiscal Issues: ATF, http://www.fiaindia.in/fiscal_issues.html.
[6]A2Z Taxcorp, supra note 3.
[7]ClearTax, GST on Petrol and Diesel in 2026, https://razorpay.com/learn/gst-on-petrol/.
[8]BusinessToday, GST Council May Discuss Inclusion of ATF to Reduce Tax Cascading, Lower Aviation Costs: Sources, https://www.businesstoday.in/latest/policy/story/gst-council-may-discuss-inclusion-of-atf-under-gst-sources-457968-2024-12-19 (Dec. 19, 2024) [hereinafter BusinessToday ATF GST].
[9]Id. (explaining that ATF manufacturers cannot claim input tax credit on GST paid on inputs, thereby compounding production costs at every stage of the supply chain).
[10]Telangana Today, Govt Cuts Windfall Tax on Petrol, Diesel, ATF Exports, https://telanganatoday.com/govt-cuts-windfall-tax-on-petrol-diesel-atf-exports (June 1, 2026).
[11]Id. (reporting crude at approximately $73 per barrel before the conflict, crossing $100 in subsequent weeks).
[12]PIB Price Stabilisation Fund, supra note 2.
[13]DD News, Govt Caps ATF Price Hike for Domestic Airlines at 25% Amid Global Fuel Shock, https://ddnews.gov.in/en/govt-caps-atf-price-hike-for-domestic-airlines-at-25-amid-global-fuel-shock/ (Apr. 1, 2026).
[14]PIB Price Stabilisation Fund, supra note 2.
[15]Outlook Bus., ATF Pinch: Air India, IndiGo Set to Trim Domestic Operations from June, https://www.outlookbusiness.com/corporate/atf-pinch-air-india-indigo-set-to-trim-domestic-operations-from-june (May 2026).
[16]News on Air, Government Slashes Domestic Levies on Petrol & Diesel; Imposes Export Duty on Diesel & Aviation Turbine Fuel, https://www.newsonair.gov.in/government-slashes-domestic-levies-on-petrol-imposes-export-duty-on-diesel-aviation-turbine-fuel (Mar. 27, 2026).
[17]AeroTime, India Hikes Export Taxes to Stabilise Jet Fuel Supply, https://www.aerotime.aero/articles/india-hikes-export-taxes-to-stabilise-jet-fuel-supply (Apr. 13, 2026).
[18]Outlook Bus., India Lowers Export Duty on Petrol, Diesel and ATF From June 1, https://www.outlookbusiness.com/news/india-lowers-export-duty-on-petrol-diesel-and-atf-from-june-1-domestic-duties-unchanged (May 31, 2026).
[19] TravelBiz Monitor, India Caps ATF Price Hike at 25% to Stabilise Airfares, https://travelbizmonitor.com/uncategorized/india-caps-atf-price-hike-at-25-to-stabilise-airfares/ (Apr. 1, 2026).
[20]PIB Price Stabilisation Fund, supra note 2.
[21]News on Air, Government Announces Relief Measures for Domestic Airlines; Cuts Airport Charges by 25 Per Cent, https://www.newsonair.gov.in/government-announces-relief-measures-for-domestic-airlines-cuts-airport-charges-by-25-per-cent (Apr. 9, 2026).
[22]Business Standard, India’s Two Largest Aviation Hubs Cut ATF Tax. How Much Can Airlines Gain?, https://www.business-standard.com/economy/news/delhi-mumbai-cut-atf-tax-how-much-airlines-gain-explained-126051900590_1.html (May 19, 2026) [hereinafter Business Standard ATF Hubs].
[23]Business Standard ATF Hubs, supra note 22 (noting Delhi’s IGI Airport handled close to 80 million passengers in 2024–25 and Mumbai airport recorded 55.5 million passengers and over 331,000 aircraft movements in 2025).
[24]Maheshwari and Co., ATF Tax India: Aviation Crisis & GST Reform 2026, https://www.maheshwariandco.com/blog/atf-tax-india-aviation-crisis-gst-reform/ (June 3, 2026).
[25]PIB Price Stabilisation Fund, supra note 2 (“capping of ATF prices is a temporary measure and not sustainable in the long run for OMCs”).
[26]BusinessToday ATF GST, supra note 8 (quoting PMO Adviser Tarun Kapoor confirming active work on ATF–GST inclusion within the fiscal year); A2Z Taxcorp, supra note 3 (quoting Minister Puri at India Energy Week 2025: “Our sense from the last GST meeting was that ATF is likely to come under GST soon”).
[27]A2Z Taxcorp, supra note 3 (estimating that at an 18% GST rate with input tax credit, primarily domestic carriers could realise a 7–9 percentage point reduction in total fuel costs).