In the graph below we have plotted monthly movement (% change in price) in the price of ATF and crude oil for the year 2005-06, the latest period for which comparable data is available. The evidence is not conclusive. While in the earlier months ATF price did tend to move with a lag on the downward leg, in the later months the trend reverses and the price movement run parallel to each other. However, it was also observed that whereas average change in the price of crude during 2005-06 was 1.96% the change in price of ATF was – 0.13%. It would thus appear that oil companies have not tried to exploit the situation to their favour. In which case it becomes important to examine how the price of ATF was fixed.
In the tables below we present price build up of ATF for four metro locations both for domestic and international airlines; the information was obtained from the Ministry of Petroleum and Natural Gas. The tables do not tell much; unfortunately it is silent on the most crucial aspect that of method of fixing price at the refinery gate and also by combining marketing margin with refinery gate price the data has been made even more opaque. Clarity in refinery gate price is important because taxes, which generally are ad-valorem are charged on basic price and even if tax rates are brought down but the basic price remains flawed then the element of unfairness persists.
Although oil companies adopted import parity pricing to determine refinery gate prices after dismantling the APM, the structure of consumer pricing continues to be linked to APM. The rationale for using the import parity pricing formula for petroleum products manufactured in India has resulted in high gross refining margins after the dismantling of the APM. In addition, the refineries have also benefited from tariff protection.
| ATF Price Build-up for Domestic Airlines | |||||
| AFS NAME | | Dum Dum | Palam | Madras | Mumbai |
| Basic Price – Refinery Gate Price+ Marketing Margin | Rs/KL | 28510 | 27290 | 27290 | 26720 |
| Freight | Rs/KL | 590.59 | 332.93 | 148.37 | 100 |
| MSL/Airfield Charges | Rs/KL | 206 | 206 | 206 | 206 |
| State Specific Cost | Rs/KL | 1520 | 2 | 1032 | 590 |
| Price after State Surcharge | Rs/KL | 30826.59 | 27830.93 | 28276.37 | 27616 |
| ED @ 8.24% | Rs/KL | 2540.11 | 2293.27 | 2329.97 | 2275.56 |
| Total | | 33366.7 | 30124.2 | 30606.35 | 29891.56 |
| Sales Tax % | | 25 | 20 | 29 | 25 |
| Sales Tax Amount | Rs/KL | 8341.68 | 6024.84 | 8875.84 | 7472.89 |
| Proposed Selling Price | Rs/KL | 41708.38 | 36149.04 | 39482.19 | 37364.45 |
| Source: Petroleum Planning and Analysis Cell, M/O Petroleum & NG | |||||
As the marketing companies did not fully recover subsidies, their burden on the sale of PDS kerosene and LPG increased substantially. However, the marketing companies realized larger margins on products outside the price control, commonly known as free trade products, which constitute nearly 30% of the product slate, e.g. ATF.
| ATF Price Build-up for International Airlines | |||||
| AFS Name | | Dum Dum | Palam | Madras | Mumbai |
| Pricing Point | | Haldia | Mathura | Chennai | Mumbai |
| Nearest Port | | Haldia | Kandla | Chennai | Mumbai |
| Basic Price – Refinery Gate Price + Marketing Margin | Rs/KL | 28510 | 27290 | 26890 | 27290 |
| (Rail Distance) | | - | - | - | - |
| Rail Freight | | - | - | - | - |
| (Road Distance) | | 330 | | 128 | |
| Road Freight | | 557.53 | | 143.97 | |
| Total Freight | Rs/KL | 557.53 | 223.08 | 143.97 | 0 |
| Service Tax on Road Freight | Rs/KL | 17.06 | 0 | 4.41 | 0 |
| Siding Charges | Rs/KL | 0 | 9.85 | 0 | 0 |
| Local Delivery Charges | Rs/KL | 0 | 100 | 0 | 100 |
| Toll tax / Octroi etc. | Rs/KL | 16 | 0 | 0 | 0 |
| Total Freight | Rs/KL | 590.59 | 332.93 | 148.37 | 100 |
| Proposed Selling Price | Rs/KL | 29100.59 | 27622.93 | 27038.37 | 27390 |
| | $/KL | 678.02 | 643.59 | 629.97 | 638.16 |
| | $/Gln | 256.66 | 243.63 | 238.47 | 241.57 |
| Source: Petroleum Planning and Analysis Cell, M/O Petroleum & NG | |||||
During the APM regime, operating costs were audited and reviewed by OCC, resulting in cost management by the companies. However, post-dismantling, the companies pushed for greater market share, incurring extra marketing expenses.
The weighted average cost of the basket of crude used by public sector refineries also increased substantially because ONGC and OIL were allowed to recover international prices and charge notional freight on domestically produced crude while paying unadjusted economic rent to the government. Consequently, ONGC and OIL started to post high profits not related to increased production levels. The government intervened and made them (along with GAIL), partially share the subsidy burden. After dismantling the APM there has been no coherence in policy or pricing methodology.
The tables, however, do bring out the fact that taxes and surcharge form an unusually proportion of final price. If we take out freight from the final price then proportion of taxes and other charges to price works out to 24% at Delhi (lowest) and 32% at Chennai (highest); for Mumbai it is 28% and for Kolkata it is 30%. Looked at in isolation the tax burden on ATF does appear to be very high but as the following graph shows when we compare it to similar petroleum product ATF comes out marginally better. But this takes
us back to our earlier argument that there is neither any transparency nor any rationality in the pricing methodology. Both diesel and ATF are basic inputs for two of the most vital mode of transport; artificially raising their price by putting unreasonably high level of taxes does not display good economic judgment. It only serves to make Indian products costlier and uncompetitive while adding to inflationary pressure.
In the table below we present statewise taxes on ATF. VAT is the most prevalent tax, only three States; namely, Karnataka, Uttar Pradesh and West Bengal levy sales tax instead of VAT. Generally VAT is leviable Singlepoint at first stage and no input credit is available. The most commonly applied rate for VAT is 20%, nevertheless the rate varies a great deal from one State to another, the highest rate being 33% (Andhra Pradesh). Other States having high VAT rates are Gujarat (30%), Bihar, Madhya Pradesh and Tamil Nadu (29%), Rajasthan 28% and Maharashtra 25%.
Among not so commonly levied taxes are entry tax (Bihar and Maharashtra), purchase tax (Andhra Pradesh, Assam, Karnataka and Tamil Nadu) and octroi (Maharashtra). Ironically, the states with relatively low flying activity have nearly the highest incidence of tax, for example, Bihar 40%, Madhya Pradesh 32%; what benefits these states might
Statewise Taxes on ATF for Domestic Airlines (as on 1.04.07) | | |||||||
State | VAT | CST | Sales Tax | Entry Tax | Octroi | Purchase Tax | Others | Total |
| Andhra Peadesh | 33 | 3 | 0 | 0 | 0 | 5 | 0 | 41 |
| Assam | 22 | 3 | 0 | 0 | 0 | 4 | 0 | 29 |
| Bihar | 29 | 3 | 0 | 8 | 0 | 0 | 0 | 40 |
| Chattishgarh | 25 | 3 | 0 | 0 | 0 | 0 | 0 | 28 |
| Delhi | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Goa | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Gujarat | 30 | 3 | 0 | 0 | 0 | 0 | 0 | 33 |
| Haryana | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Himachal Pradesh | 20 | 0 | 0 | 0 | 0 | 0 | 0 | 20 |
| Jammu Kashmir | 20 | 0 | 0 | 0 | 0 | 0 | 0 | 20 |
| Jharkhand | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Karnataka | 0 | 3 | 28 | 0 | 0 | 28 | 1.5*** | 60.5 |
| Kerala | 0 | 3 | 0 | 0 | 0 | 0 | 15** | 43 |
| Madhya Peadesh | 28.8 | 3 | 0 | 0 | 0 | 0 | 0 | 31.75 |
| Maharashtra | 25 | 3 | 0 | 25 | 3 | 0 | 0 | 56 |
| Orissa | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Punjab | 20 | 3 | 0 | 0 | 0 | 0 | 0 | 23 |
| Rajasthan | 28 | 0 | 0 | 0 | | 0 | 0 | 28 |
| Tamil Nadu | 29 | 3 | 0 | 0 | 0 | 5 | 0 | 37 |
| Uttar Pradesh | 0 | 0 | 20 | 0 | 0 | 0 | 1* | 21 |
| Uttaranchal | 20 | 0 | 0 | 0 | 0 | 0 | 0 | 20 |
| West Bengal | 0 | 3 | 25 | 0 | 0 | 0 | 20*** | 48 |
| * State Dev Tax | ** Addl Tax on ST | | *** Resale Tax | | ||||
| Source: Petroleum Planning and Analysis Cell, M/O Petroleum & NG | ||||||||
The foregoing table merely re-establishes the already known fact that ATF is a heavily taxed item in most states. The most cited argument in defence of high tax on ATF is the so-called elite status that flying is supposed to enjoy in this country. This argument at best can be described as a baggage from the past. In terms of economic history it was during the ancient period that distinction used to be drawn between wage goods and luxury goods; in a subsistence economy this made a lot of sense. But the world, along with it India, has come a long way since then. Rapid and dramatic fall in air fare has made flying affordable even for the not so rich segment of the population. To consider air transport as elitist betrays a lack of understanding of the current economic reality. Moreover, on what basis does one make a judgement that one mode of transport is more beneficial, desirable and relevant than the other. Value judgements can be dangerously biased and should not be allowed to enter into any economic decision.
Furthermore, one chooses to travel by air or ship goods by air not because flying entails any unique experience but rather to save on travel time. In fact, if we look at travel that is made for the sake of the travel itself, most travellers find the experience uncomfortable and even stressful. Perception of discomfort and stress increases more than proportionally with the amount of time that a trip takes. So in making the trade off between travelling or not travelling and in using one mode rather than another, these considerations are taken into account, and are reflected in the mode choice Working time savings have a value because output is otherwise lost to the employer, whilst the employee is travelling. Thus, every minute saved on travelling adds to productivity gain. Therefore to consider saving of time as a sign of opulence is utterly fallacious and to fashion taxation policy around a erroneous belief is even more unjustified.
Comparative Price of ATF
In the table below we compare price of ATF in India with that in New York, US Gulf Coast, Los Angeles, Rotterdam and Singapore. Price of ATF in India is significantly higher than other locations. Since February 2007 though, the difference in price has narrowed down to Rs 4000/kl as compared to Rs 8000-9000/kl earlier (ex Delhi). This is largely a reflection of exchange rate effect. In recent months rupee has strengthened against the dollar; in November 2006 the exchange rate was Rs. 44.85, which went up to Rs. 41.30 in April 2007. However, it needs to be noted here that while the rupee has appreciated by almost 8% the price of ATF has come down only by about 2.5%. Thus a greater part of the benefit of exchange rate appreciation has been retained by the oil
| Price of ATF in Selected Locations (Rs/kl) | ||||||
| | Nov-07 | Dec-07 | Jan-07 | Feb-07 | Mar-07 | Apr-07 |
| New York Harbour | 29877.133 | 31089.086 | 28386.285 | 29631.454 | 31399.28 | 32709.912 |
| U.S. Gulf Coast | 29422.134 | 30583.833 | 27758.686 | 29091.515 | 30772.594 | 32604.231 |
| Los Angeles | 31984.049 | 34985.783 | 29911.654 | 31084.107 | 31994.298 | 33275.146 |
| Rotterdam (ARA) | 29968.812 | 31611.237 | 28481.935 | 29735.096 | 30642.59 | 31569.836 |
| Singapore | 29809.222 | 31131.331 | 27854.336 | 28559.934 | 29799.232 | 30825.265 |
| Delhi (Rs/kl) | 37059.02 | 36150.47 | 37746.92 | 33982.95 | 34592.97 | 36149.04 |
| Source Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm, accessed on 13.05.07), Delhi-IOC http://www.iocl.com/print_atfprice.htm; accessed on 11/14.05.07 | ||||||
companies and not passed on to the airlines. This once again underlines the absence of clarity and transparency in the pricing mechanism.
Import of ATF
India produces more ATF than its domestic requirement and therefore does not need to import. The last import of ATF was in 1997-98 that too an insignificant quantity of 55 TMT valued at Rs. 34 crore. India has been exporting small quantities of ATF since 2000-01. Import of ATF is governed by Aviation Turbine Fuel (Regulation of Marketing) Order, 2001 and Ministry of Petroleum and Natural Gas Resolution No. P-23015/1/2001-Mkt dated 08.03.2002.
As per the Order no person other than those authorised by the Central Government are permitted to sell aviation fuel. Whosoever desires to secure authorisation to sell ATF has to submit an application to the Central Government. However, not all are eligible to apply for authorisation only those meeting the conditions laid down in the Resolution of 2002 can make an application.
The Regulation of 2002 regulates marketing of transportation fuels, namely petrol, diesel and ATF. As per the 1997 Resolution, companies owing and operating refineries with an investment of at least Rs. 2000 crore or oil exploration and production companies producing at least 3 million tonnes of crude oil annually were entitled for marketing rights for transportation fuels. Under the Resolution of 2002, now authorisation to market ATF is also available to company investing or proposing to invest Rs. 2000 crore, in exploration and production, refining, pipelines or terminals. Thus in effect, airlines are pre-empted from directly importing ATF.
Industry Perspective
Federation of Indian Airlines has submitted an Issues Paper presenting the airline industry’s perspective on the matter, their views is summarised below.
v The distortion in ATF price by the domestic oil companies and the taxation structure results in a huge burden on the airline bottom-lines – making airlines in India uncompetitive and unattractive for equity capital and debt financing.
v FIA believes that Rationalization of ATF prices for domestic operations, to international benchmarks will result in an estimated annual savings of USD 624 million for the airline industry.
Tax Structure
· Customs duty on ATF for domestic operations should be reduced
· Excise duty on ATF should be made 4%
· ATF should be given “declared goods” status, thereby attracting a uniform 4% sales tax across India
ATF Base Price, Pricing mechanism & competition
· The Ministry of Petroleum & Natural Gas should instruct the state owned oil companies to provide immediate relief to the Airlines by reducing the base price of ATF.
· The ATF pricing should be made transparent by building in the various sub-heads in the billing process.
· The increases in ATF prices passed on to the domestic carriers should not be higher than the increases in the benchmark prices;
· The decreases in the benchmark prices should be fully passed on to the Airlines;&
· The marketing margins built-in by the oil companies in fixing the ATF prices should be reduced and competition be introduced in the supply of ATF by allowing private players to supply ATF at Indian airports.
ATF Distribution Infrastructure
· The current storage and supply facilities for ATF at the Indian airports should be converted to Common User facilities owned by a neutral agency instead of duplication of such infrastructure, by investments in separate facilities by the state owned oil companies as at present.
Conclusion: Why Price of ATF (and Tax Thereon) is Crucial for Aviation
· ATF is the basic raw material for the aviation industry, there are no alternatives to ATF and it would be stating the obvious to say that there would be no aviation industry without ATF.
· Fuel bill for domestic airlines accounts to nearly 40% of the total operating cost. The estimated annual fuel bill for the industry is around USD 1.7 billion, based on September 2006 rates.
· Intense competition within the industry and a consumer base that is price sensitive does not permit passing on of tax incidence to consumers.
· Excessive ATF rates in India over the years have hurt the financial health of the domestic airlines and contributed to their accumulated losses.
· A reduction in the cost of ATF cost has a significant impact on the airline balance sheets. According to Federation of Indian Airlines (FIA) a reduction in ATF price by 65% results in a close-to 25% increase in operating profits. FIA further estimates that a mid-sized airline in India whose balance sheet indicates an operating loss of Rs 12,000 lakh for the quarter ended 31st December 2006, would in fact have reported an operating profit of Rs 3,000 lakh for the same period if the ATF charges were closer to international benchmarks.
