To insulate airlines from such volatility, the government may in the forthcoming Budget for 2020-21 fiscal year may bring specific excise duty expressed in Rs per kilolitre, sources aware of the development said.
Petrol and diesel already attract a specific rate of excise duty and so ATF naturally qualifies for such a shift, they said.
Finance Minister Nirmala Sitharaman will present her second budget on February 1.
Explaining the duty structure, sources said if cost of production of ATF is Rs 100 per kilolitre, the fuel at exit from the refinery will be priced at Rs 111 per kilolitre after levying 11 per cent excise duty. If the cost rises to Rs 110, the ex-refinery rate would attract an excise duty of Rs 12. A specific duty of say Rs 11 per kilolitre would mean that even if the cost goes up the tax incidence would remain the same.
Petrol and diesel already attract specific excise duty for the same purpose. Excise duty on petrol currently is Rs 21.16 per litre and that on diesel is Rs 15.83 a litre.
This, they said, would ensure correct payment of duty at the initial clearance stage itself and will eliminate complexities and difficulties in redetermination of duty on further stock transfers which sometime result in avoidable litigation.
Specific excise duty would address part of the concerns of oil companies and airlines of not being able to set of tax paid on inputs against the tax on final product as ATF has been kept out of GST regime.
When the Goods and Services Tax (GST) was introduced on July 1, 2017 amalgamating 17 central and state levies, five commodities namely crude oil, natural gas, petrol, diesel, and ATF were kept out of its purview given the revenue dependence of state governments on this sector.
Under the existing structure, both natural gas and ATF attract the Centre's excise duty and a state's value-added tax (VAT). Both these and all other levies will get subsumed under GST if they are brought under its ambit.
The decision on their inclusion depends on the financial position of states as revenues from these five petroleum products constitute a substantial chunk of state government finances.
The aviation ministry has time and again sought inclusion of ATF under GST as any surge in international oil rates gets reflected in domestic jet fuel prices, leading to costlier air tickets. Oil Ministry too has favoured including ATF along with natural gas under the GST regime to help companies set off tax that they paid on input.
ATF makes up for almost half of the cost of an airline and rates vary from state to state depending on local VAT.