There is a file somewhere in the Ministry of Civil Aviation — dusty, probably digitised now, almost certainly unread — that contains a proposal from June 2014.

It recommended that Indian airlines be allowed to directly import Aviation Turbine Fuel, and that oil marketing companies be asked to share their infrastructure to make this happen.¹ The legal permission to import directly had already existed since February 2012 — won after the industry lobbied, a Group of Ministers deliberated, and a Cabinet-level decision was formally notified by the Ministry of Commerce on February 22, 2012.^PIB All that was needed was infrastructure. The estimated cost: roughly ₹2,000 to ₹2,500 crore. A one-time investment.

That proposal went nowhere.

Between 2014 and 2026, Indian airlines paid approximately ₹1.62 lakh crore in taxes on aviation fuel — excise duty, state VAT, and the compounding effect of a system with no recovery mechanism. Had the 2014 infrastructure proposal been acted upon, airlines could have saved ₹1.04 lakh crore of that through direct fuel import, substantially avoiding the state VAT burden that attaches to local OMC sales of ATF — because direct import for own use changes the transaction itself, not merely the rate. Net of every rupee of capital and operating cost, the missed saving stands at just over one lakh crore rupees.²

That is not a rounding error. It is larger than the entire annual revenue of IndiGo — ₹71,231 crore in FY2023–24 — India’s biggest airline.³ It is the accumulated losses of the entire Indian aviation industry since 2007.⁴ It is money that could have lowered fares, funded new routes, kept airlines solvent, and connected hundreds of millions of Indians to the skies. Instead, it was collected — quietly, relentlessly — as tax and margin, through a structure that everyone agreed was broken and nobody fixed.

The diagnosis is not new. In September 2012, the central government opened the aviation sector to foreign airline investment, allowing up to 49% foreign direct investment in domestic passenger airlines.⁵ It was a significant reform. Foreign investment had been permitted in the sector since 2000, but foreign airlines had been barred from investing directly or indirectly in domestic carriers until that announcement.

The government’s stated rationale was sound: FDI would bring “the much needed funds and expertise required by the domestic industry.”⁵ The industry needed both. Between 2007 and 2010, Indian airlines had accumulated losses of ₹26,000 crore.⁴ By 2011-12, the industry’s estimated debt burden had reached $20 billion.⁴

But even then, independent analysts were pointing at a deeper problem. As the PRS Legislative Research blog noted at the time, “foreign investment alone cannot solve the problem.”⁵ The reason: ATF accounted for 40% of the operating cost of Indian carriers — double the 20% share that fuel represents for international carriers.⁵ And ATF in India was priced, on average, 60% higher than international prices — almost entirely due to the high rate of taxation imposed by state governments, where VAT on ATF ranged from 25% to 30% in most states.⁵

FDI could bring capital. It could not repair a cost structure built on a tax policy that made Indian aviation structurally uncompetitive from its first flight of the day.

Aviation Turbine Fuel in India carries two layers of tax for domestic operations. The central government levies basic excise duty — at an effective rate of approximately 11% on the pre-tax base price for domestic operations. State governments levy Value Added Tax on top of the excise-inclusive price, and these rates vary wildly: Tamil Nadu at 29%, West Bengal at 25%.⁷ In May 2026, under pressure from rising global jet fuel prices and airline lobbying, two of India’s biggest aviation hubs acted: Maharashtra cut from 25% to 7% (from 15 May 2026, for six months), and Delhi cut from 25% to 7% (from 16 May 2026, also for six months). Andhra Pradesh and Telangana charge just 1%, having long made the competitive calculation that attracting more flights is worth more than the VAT revenue.

The combined effective tax burden on ATF for domestic operations is approximately 24.9% of the final inclusive price — or about 33% on the pre-tax base. This entire amount is a dead cost: ATF was deliberately excluded from the GST framework when it was launched in 2017, which means airlines cannot claim input tax credit on a single rupee of fuel tax.⁸ Every litre burned on a domestic route embeds a tax cost that is then charged to the passenger, inflated further because GST on the ticket is applied to a base price that already contains the unrecovered fuel levy. Tax on top of tax.

Meanwhile, ATF for international operations is effectively zero-rated. This is not a concession granted by India — it is a global norm rooted in the Chicago Convention of 1944, which prohibits taxation of fuel for international carriage on a reciprocal basis. The same aircraft, the same fuel, a different destination: and an entirely different tax treatment.

The 2012 permission for direct ATF import was genuine — it came from a Group of Ministers, not a routine ministry notification, and it was formally gazetted by the Ministry of Commerce.^PIB But a permission that required each airline to individually apply to DGFT and then build its own infrastructure from scratch is not, in practice, a permission most airlines can use. The door opened. The path did not.

The June 2014 proposal from the Ministry of Civil Aviation recognised this precisely.¹ It suggested that OMCs be asked to share their existing infrastructure at an agreed cost. It was reasonable, practical, and workable. It would have required the government to sit OMCs and airlines in a room, set a fair throughput tariff, and mandate both parties to make it happen. The ministry simultaneously recommended a uniform 4% VAT on ATF nationally — another straightforward ask that would have transformed airline economics at a stroke.¹

The investment needed: approximately ₹2,000–2,500 crore in airport storage, port import terminals, and pipelines.² At prevailing fuel volumes and prices in 2014, the payback period would have been under six months. By 2026, the cumulative VAT saving through direct import totals approximately ₹1.085 lakh crore (the sum of annual savings shown in Infographic 6). After deducting the estimated ₹2,500 crore infrastructure cost and approximately ₹2,000 crore in cumulative operating and financing costs, the net missed saving stands at approximately ₹1.04 lakh crore — a conservative figure that rounds down, not up.²

This asymmetry is not subtle. It is a structural, policy-created incentive for every Indian airline to prioritise flying foreigners on international routes over flying Indians on domestic ones. When Air India and IndiGo recently cut domestic operations and expanded international capacity, citing fuel costs as a driver,⁹ they were not making an irrational commercial decision. They were responding rationally to an irrational tax structure.

This is ultimately not a story about airline economics. It is a story about why a Delhi–Mumbai ticket costs what it does, and why flying in India remains out of reach for most of its population.

Fuel is 40% of an Indian airline’s operating costs — twice the global average of 20%.⁵ A significant portion of that is not fuel at all. It is the VAT that Chennai charges at 29%. It is the cascading effect of taxes compounding into every fare. When an airline operating from Chennai pays 29% state VAT with no recovery — Tamil Nadu has not moved its rate despite central government lobbying — and then collects GST from the passenger on a ticket price that already embeds that 29%, the passenger is effectively paying tax on a tax. Without knowing it, without consenting to it, and without any policy justification for why aviation should be treated this way while other industries get input tax credit on their primary input. Even where states have acted — Delhi and Maharashtra both cut to 7% in May 2026, though only for six months — the structural problem of zero input tax credit remains.

India’s government has added airports through the UDAN scheme, reduced VAT in a handful of states after years of industry lobbying, and privatised Air India. These are meaningful actions. None of them address the root cause. The government is, in effect, spending money subsidising airlines to fly routes made artificially uneconomic by a tax structure it refuses to fix.

The fix is not complicated. Three things, in order of urgency:

First, bring ATF under GST. The GST Council has discussed this repeatedly and deferred it repeatedly — including a formal rejection of the airline industry’s request in December 2024.^8,11 Union Minister Hardeep Singh Puri stated in 2025 that inclusion is likely.¹¹ It needs to stop being likely and start being legislated. Input tax credit on ATF would reduce the effective domestic fuel cost burden immediately, without requiring any infrastructure investment or bilateral renegotiation.

Second, mandate regulated open access to airport fuel infrastructure. The risk with the OMC infrastructure-sharing model is that the OMCs — who are both infrastructure owners and fuel suppliers — would price throughput fees to neutralise any saving airlines gain. The answer is regulated access at a cost-plus tariff, exactly as India regulates telecommunications tower access and power transmission infrastructure. Natural monopolies require regulatory oversight; airport fuel hydrants are natural monopolies.

Third, facilitate an industry fuel consortium. Give airlines the legal and regulatory framework to collectively procure ATF at international prices, pool import infrastructure costs, and compete on service rather than on who can absorb the most fuel tax. The model exists internationally — Singapore, Dubai, and most major European airports operate shared fuel procurement structures. India has fourteen years of precedent to draw on. It simply hasn’t chosen to.

None of this is new thinking. All of it was on the table in 2012, in 2014, and at every Budget and GST Council meeting since. The only thing standing between Indian aviation and a structurally lower cost base is the political will to disturb a few revenue lines in a few state capitals — and to tell the oil marketing companies that their position in aviation fuel exists to serve the nation’s connectivity, not to substitute for a policy the government has chosen not to make.

Fourteen years ago, someone wrote a note recommending exactly that. It is not too late to read it.