The civil aviation ministry has proposed slashing state taxes on jet fuel, which may significantly bring down costs for ailing local airlines that are reeling under a debt load of $20 billion and annual losses of $2 billion.
The ministry has sought opinion from stakeholders on reducing state taxes on jet fuel to a uniform 4%, according to a discussion paper posted on its website.
Different states impose sales tax at varying rates on aviation turbine fuel, going as high as 30%. High fuel expenses, contributing nearly half the costs incurred by airlines, has compounded woes for the sector struggling with intense competition.
"Reduction in the fuel tax would allow the Indian carriers to become competitive in servicing passengers to their respective hubs within India and compete with international carriers. This advantage would allow them to increase their market share," the paper said.
The ministry has also proposed to abolish service tax on air tickets, which according to the paper, makes air travel "a luxury rather than an efficient mode of transport."
Service tax, including fuel surcharge, is currently 773 rupees or 10.3% of the total fare, whichever is lower, for an economy ticket on international flights.
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India has already allowed carriers to import jet fuel directly and has proposed letting foreign airlines invest in local carriers, hoping the moves will aid the embattled sector.
Analysts estimate that the move to allow direct imports could reduce costs by 15 to 20% as airlines would not have to buy fuel from oil marketing companies, which are mandated to levy various federal and state taxes.