India’s civil aviation sector has, over the course of the past several months, found itself at the confluence of a geopolitical shock, a structural tax anomaly, and the most severe operational cost crisis its airlines have faced in recent memory. The trigger was the escalation of hostilities in West Asia, a conflict that disrupted global crude oil supply chains, spiked international jet fuel prices, and imposed airspace restrictions that forced Indian carriers onto longer, more fuel-intensive flight routes. The consequence has been an aviation turbine fuel price environment of exceptional severity, one that has compelled both the Central Government and select state governments to intervene through a series of fiscal and regulatory measures spanning the period from March to June 2026.
The Scale of the Problem: ATF Prices and Their Cascading Impact
To appreciate why the government’s response has been both urgent and multi-pronged, it is essential to first understand the scale of the cost shock. Aviation turbine fuel accounts for approximately 35 to 40 percent of an airline’s total operating expenditure in India, a figure significantly higher than the global average, and one that is itself a direct consequence of India’s elevated ATF tax burden. By May 2026, ATF prices at airports across India had risen from approximately INR80,000 per kilolitre to over INR1,00,000 per kilolitre, with the precise rate varying by city due to the differing VAT rates imposed by state governments.
The real-world consequences of this cost environment became visible in the last week of May 2026, when Air India and IndiGo announced significant reductions in their scheduled operations for the period June through August 2026. Air India disclosed a reduction of up to 22 percent in domestic flight frequencies, along with cuts to select international services including the suspension of operations on certain routes. IndiGo announced a 5 to 7 percent reduction in domestic capacity and a 17 percent reduction in its international capacity. Industry expert reports’ project that Indian carriers would collectively operate 7 percent fewer domestic weekly flights year-on-year in June 2026, with scheduled services declining from 22,220 to 20,670 weekly flights. These are not marginal adjustments; they represent a material contraction in India’s aviation capacity driven, in direct and documented terms, by fuel cost unviability.
The Government’s Response: A Sequence of Interventions
Faced with this developing crisis, the Government of India and certain state governments have responded through a layered sequence of fiscal measures. It is important to understand each of these measures on terms of their legal character, scope, and effect, before assessing them collectively.
The Central Government’s first measure in this regard came on March 27, 2026. whereby the Centre reduced central excise duty on petrol and diesel by INR 10 per litre for domestic consumption, by way of notification issued under the Central Excise Act, 1944. Separately, and by a distinct notification dated March 26, 2026, issued in exercise of powers under Section 5A of the Central Excise Act, 1944 read with Section 147 of the Finance Act, 2002, the Centre introduced Special Additional Excise Duty on exports of petroleum products, including ATF. The export duty on ATF was set at INR 29.5 per litre and on diesel at INR 21.5 per litre. The stated objective of the export duty was to ensure domestic availability of petroleum products by disincentivising their export in conditions where international prices made overseas sales more attractive to private refiners than domestic supply. Union Finance Minister Nirmala Sitharaman, announcing both measures, stated that the decisions had been taken in view of the West Asia crisis to protect consumers from rising prices.
On April 1, 2026, the Centre introduced two further steps: a cap on ATF price increases for domestic airline operators at 25 percent, and an Emergency Credit Scheme to address the liquidity pressures that airlines had been reporting through the preceding months.
At the state level, the Government of Maharashtra, by notification effective May 15, 2026, reduced VAT on ATF from 18 percent to 7 percent for a period of six months, valid until November 14, 2026. The reduced rate is applicable to domestic flight operations; international carriers operating from Maharashtra airports were already exempt from VAT on ATF and continue to remain so. The Government of Delhi followed on May 17, 2026, when a Cabinet meeting chaired by the Chief Minister approved a corresponding reduction in Delhi’s ATF VAT rate from 25 percent to 7 percent, also for an initial six-month period.
Both state governments have disclosed the fiscal cost of these decisions. Delhi estimates a revenue foregone of approximately INR 985/- crore, a figure that is contextualised by the fact that ATF VAT contributes approximately INR1,368/- crore annually to the state exchequer, constituting nearly 19 percent of Delhi’s total annual VAT collections. Maharashtra’s corresponding estimate is INR 550/- to INR600/- crore annually.
Effective June 1, 2026, the Central Government revised the fortnightly export duty on ATF to INR 9.5 per litre, pursuant to its established practice of recalibrating the Special Additional Excise Duty (SAED) rate on a fortnightly basis based on average international crude and product prices in the preceding period. This revision applies to export duties only and does not affect the domestic excise duty structure on ATF.
It is also relevant to note that the Union Budget 2026 had removed the basic customs duty, previously ranging from 7.5 to 15 percent, on components and parts used in the manufacture of civilian aircraft. This measure operates independently of the ATF cost framework but forms part of the broader fiscal policy aimed at reducing input costs across the aviation sector.
The Constitutional Architecture: Why ATF Remains Outside GST
To understand why the government’s response has been so fragmented including a state VAT cut, a central export duty revision, an emergency credit scheme, it is most essential to understand the constitutional framework that governs ATF taxation in India. Petroleum products, including ATF, fall within the State List in the Seventh Schedule to the Constitution of India. By virtue of this classification, and by the explicit exclusion of these products from Schedule V of the Central Goods and Services Tax Act, 2017, ATF continues to remain outside the Goods and Services Tax regime. States retain independent authority to levy VAT on ATF at rates of their discretion, without any obligation of uniformity or any ceiling imposed by central legislation.
Hence, the practical consequence of this constitutional framework is a nationally fragmented ATF tax landscape. Prior to the May 2026 reductions, VAT on ATF ranged from as low as 1 percent at airports covered under the UDAN (Ude Desh ka Aam Nagrik) scheme to as high as 25 to 29 percent at airports in certain high-revenue states. Delhi, at 25 percent, and Maharashtra, at 18 percent, were among the highest-rated states in the country and, as noted, also the locations of India’s two busiest aviation hubs. This was not merely an economic anomaly; it was a policy contradiction of the first order, and one that persisted for years precisely because the states most affected, those with the highest VAT rates, were also those with the most to lose fiscally from rate reductions.
Delhi Chief Minister acknowledged this topic as well, noting that while the GST regime has been in force since 2017, states retain authority to levy VAT on six specified petroleum products under the State List, and that ATF’s exclusion from GST is accordingly a constitutional feature rather than a legislative oversight. That acknowledgment is significant: it is a recognition by a state government that the structural problem, the absence of ATF from GST is real, and that the VAT reduction being announced is a workaround necessitated by crisis rather than a solution to the underlying design flaw.
What This Means for the Industry and What Remains Unresolved
The cumulative effect of the government’s recent notifications, the March export duty imposition to protect domestic supply, the April price cap and emergency credit facility, the May state VAT reductions, the Budget 2026 removal of customs duties on aircraft components, and the June 1 export duty recalibration, is a meaningful, reduction in the cost burden facing Indian aviation. For airlines operating intensively out of Delhi and Mumbai, the state VAT reductions alone translate into significant per-kilolitre savings on their largest cost input. The export duty revision effective June 1 provides additional indirect support by improving refinery economics and domestic fuel availability.
Yet the structural problem remains entirely intact. The VAT reductions in Delhi and Maharashtra are explicitly temporary, operative for six months, subject to review, and carrying no statutory assurance of extension. Airlines cannot factor a temporary VAT rate into long-term fleet planning, route development models, or aircraft financing arrangements with assurance. A carrier whose route economics are calibrated on a 7 percent VAT regime in Delhi has no legal protection against that rate reverting to 25 percent when the concessional window expires in November 2026. The emergency credit scheme and ATF price cap are similarly temporary crisis measures rather than permanent regulatory reforms.
The case for bringing ATF within the GST framework is, if anything, stronger today than it was before this crisis. A uniform national tax rate on jet fuel, set by the GST Council through its established constitutional process, would eliminate the distortions created by state-by-state variation, provide airlines with the long-term cost predictability that fleet investment and route planning require, allow input tax credits on fuel expenditure, and end the recurring cycle of ad hoc state-level interventions during periods of sector stress. The constitutional mechanism for achieving this exists; what has historically been absent is the political consensus within the GST Council to exercise it.
The events of March through June 2026 have made that political conversation considerably more urgent. India consumed approximately 764 thousand metric tonnes of ATF in February 2026 alone, according to data published by the Petroleum Planning and Analysis Cell. The aviation sector serves 167 million domestic passengers annually per DGCA figures. The financial health of Indian carriers is not a sectoral concern; it is a matter of national connectivity infrastructure. Aviation stakeholders would be well-advised to use this moment to press the case for a durable, structural solution with renewed focus. A six-month VAT reprieve in two states is useful. A permanent, nationally uniform ATF tax framework would be transformative. Temporary relief, however well-designed, does not substitute for structural reform. Until ATF finds its rightful place within the GST framework, the sector will remain one geopolitical shock away from the next crisis, and the next round of emergency measures.
