Delhi, Mumbai Cut Aviation Fuel Tax To 7 Percent, Move May Help Airlines Tackle Rising Costs

India's aviation sector has received a major relief after Delhi and Maharashtra sharply reduced taxes on aviation turbine fuel (ATF), easing pressure on airlines struggling with soaring operational costs triggered by the Iran conflict, rising crude prices and rupee weakness.

Delhi has cut VAT on ATF from 25 per cent to seven per cent for six months, while Maharashtra reduced Mumbai's ATF VAT from 18 per cent to seven per cent for domestic flight operations. The move comes at a time when airlines have warned that escalating fuel costs are threatening route viability and profitability across the sector.

Why The Delhi And Mumbai Tax Cuts Matter Most

The significance of the tax reduction lies in the dominance of Delhi and Mumbai in India's aviation network. These two metro hubs account for a massive share of passenger traffic, international operations and airline refuelling activity, making any fuel tax reduction there far more impactful than similar cuts elsewhere.

Delhi's Indira Gandhi International Airport handled nearly eight crore passengers during 2024-25, according to figures cited by Chief Minister Rekha Gupta, making it the country's busiest airport. Mumbai airport, meanwhile, handled 55.5 million passengers in 2025 and recorded more than 331,000 aircraft movements.

Because airlines purchase enormous quantities of fuel daily at both airports, even a small VAT reduction can result in significant savings for carriers operating extensive domestic and international networks.

According to Petroleum Planning and Analysis Cell (PPAC) data, India consumed nearly 764 thousand metric tonnes of ATF in February 2026 alone. Directorate General of Civil Aviation (DGCA) figures also showed domestic airlines carried nearly 167 million passengers in 2025, underlining the scale of fuel demand across the industry.

Iran Conflict, Expensive Oil And Weak Rupee Add Pressure

The tax relief follows growing concern within the aviation industry over spiralling fuel costs. In a formal letter sent to the Ministry of Civil Aviation on April 26, the Federation of Indian Airlines (FIA), which represents Air India, IndiGo and SpiceJet, warned that fuel costs had climbed to 55 to 60 per cent of airline operating expenses compared to 30 to 40 per cent before tensions escalated in West Asia.

The sharp increase came after disruptions around the Strait of Hormuz following the intensifying US-Iran conflict. Nearly 20 per cent of global oil and LNG supplies move through the strategic maritime route, making the region critical for global energy markets.

Global jet fuel prices subsequently jumped from 99.4 dollars per barrel at the end of February to 162.89 dollars per barrel for the week ending May 8, 2026.

At the same time, airlines are also dealing with rising lease rentals, aircraft shortages, maintenance expenses, engine inspection issues and delays in aircraft deliveries. India's dependence on imported crude oil has further increased the sector's vulnerability to geopolitical tensions and currency fluctuations, with the country importing more than 85 per cent of its crude requirement.

Airlines May Change Refuelling Strategies

Industry experts believe the VAT cuts could also alter how airlines manage fuel loading and route operations.

For years, carriers have relied on "fuel tankering", a practice where aircraft carry additional fuel from lower-tax airports to avoid purchasing fuel at more expensive locations. Although the strategy reduces fuel costs, it increases aircraft weight and lowers fuel efficiency.

With Delhi and Mumbai now offering lower VAT rates, airlines may reduce such tax-driven operational adjustments, improving route economics and efficiency.

Carriers with large hub operations at these airports, particularly Air India and IndiGo, are expected to benefit the most from the lower fuel burden.

The financial strain is already visible in airline performance. Air India recently suspended flights to Chicago, Newark and Shanghai while cutting frequencies on routes to San Francisco, Paris and Toronto. IndiGo's net profit also dropped 77.6 per cent year-on-year to Rs 549 crore in the third quarter of FY26 amid rising fuel and operational costs.

Why Airfares May Not Fall Immediately

Despite the tax reductions, passengers are unlikely to see an immediate drop in ticket prices. Aviation pricing in India is largely driven by demand and seat availability rather than direct pass-through of operating cost reductions.

DGCA data continues to show strong passenger demand, while airlines are simultaneously facing capacity constraints due to aircraft groundings, engine maintenance issues and delivery delays from manufacturers.

This imbalance has strengthened airlines' pricing power on key domestic sectors, particularly metro routes. Analysts believe the lower fuel taxes may help carriers stabilise margins and absorb financial stress instead of sharply reducing fares.

Some experts say ticket prices could soften gradually if global crude prices ease further and tensions in West Asia de-escalate. However, meaningful fare reductions would likely require a sustained decline in fuel prices.

Under Maharashtra's revised policy, the seven per cent VAT applies only to domestic operations. International airlines operating from Maharashtra airports were already exempt from VAT on ATF.

States Accept Revenue Hit As GST Debate Returns

Both Delhi and Maharashtra have acknowledged the financial cost of the tax cuts.

Chief Minister Rekha Gupta said Delhi could lose nearly Rs 985 crore in revenue because of the decision, though she argued the move would strengthen Delhi's position as a major aviation hub. According to Gupta, ATF VAT contributes around Rs 1,368 crore annually, nearly 19 per cent of Delhi's total yearly VAT collections.

Maharashtra officials have similarly estimated a yearly revenue loss of around Rs 550 to 600 crore.

The latest reductions have also revived industry demands to bring ATF under the Goods and Services Tax (GST) framework. Airlines have long argued that keeping aviation fuel outside GST leads to fragmented taxation, operational inefficiencies and inflated fuel costs because VAT rates vary sharply across states.

Before the latest revisions, Delhi levied 25 per cent VAT on ATF, while Tamil Nadu continued to impose the country's highest rate at 29 per cent, followed by West Bengal at 25 per cent.

Airlines have repeatedly urged the Centre to include ATF under GST so carriers can claim input tax credits on fuel purchases and simplify route planning. However, despite years of lobbying by the aviation industry, no formal announcement has yet been made by the government on bringing ATF under the GST regime.