Flying into a Legal Storm: Indigo and India’s Constitutional Tax Trap

[Yusra and Praneet are students at Rajiv Gandhi National University of Law.]

IndiGo, India's leading cost-friendly carrier, has announced a strategic shift from domestic ‘short-haul’ flights to international ‘long-haul’ aviation. As of 1 July 2025, IndiGo has already initiated services on flights from Mumbai-Manchester, and Mumbai-Amsterdam. The ‘long-haul’ business is a different game altogether; longer duration, increased fares, larger aircrafts, etc. Will IndiGo be able to translate its domestic success to the international sphere?

Historically speaking, while observing major domestic airlines going international in India, this move by IndiGo seems risky at the very least. Two prime examples of this would be Kingfisher Airlines and Jet Airways. Both these giants also have ventured into the long-haul flight market, however despite heavy investment and meticulous planning both Kingfisher and Jet Airways sunk under overwhelming debt.

It may be too early to say that these two examples are the norm if an Indian airline tries to expand. IndiGo is not particularly known for playing by the book; its policies are fairly inconsistent with general airline practice in India. These distinct practices are generally accredited as key reasons for its domestic success. This article aims to dissect the taxation on aviation turbine fuel (ATF) faced by airlines like Indigo and whether international expansion is viable given the current system of non-uniform taxation.

Economic Barriers to Airline Expansion

An endless number of technicalities may be discerned as reasons for an airlines’ bankruptcy in India. Though upon a general examination, one reason seems to stand out the most i.e., excessive taxation on ATF.

Taxation on ATF

Expenditure on fuel is by far the costliest factor for airline functioning. It accounts for nearly 45% of any airlines’ overall expenses. This by itself does not pose any risk, but when coupled with Indian taxation laws it’s a different story. Taxation is divided between the States and the Union through the Seventh Schedule of the Constitution. Entry 54 of the State List has petroleum products which includes ATF. Since ATF is outside the GST framework, States have the power to levy Value Added Tax (VAT) on it. India charges VAT on ATF, making this tax a subject of state discretion. State VAT has gone as high as 29% as seen in Tamil Nadu.

The focus of this article will be ATF tax specifically, as this aspect is still largely a subject of the Indian legislative landscape. It is not fair to say that the government is completely dormant regarding this matter, since the same has been seen to push for a lower rate of tax on ATF at many instances.

In one such instance, Civil Aviation Minister Mr Jyotiraditya Scindia addressed the 13th International Conference cum Awards on ‘Civil Aviation and Cargo-Driving post-covid Growth’ meeting organized by the Associated Chambers of Commerce and Industry of India (ASSOCHAM). He stated that the government has undertaken certain measures to curb this issue such as scrapping of royalties to leverage India’s position in the maintenance, repair and overhauling (MRO) industry, along with co-operation with state governments to reduce VAT on ATF.

As a result, around 23 states have significantly reduced state VAT on ATF, keeping it within the range of 1-5% as against the previous 15-30%. The remaining states have, however, maintained their position, leaving the rates unchanged till present day. ATF is a valuable source of revenue for the state governments, changing their stance on it has and always will be a massive hurdle for the government.

It now becomes imperative to ask – why do such differences exist in the first place? The answer lies in the constitutional stance on ATF, that the authors have titled the Constitutional Tax Trap of Civil Aviation.

Currently, taxation on ATF is kept outside the framework of the goods and services tax (GST) regime as under Article 246A of the Constitution. Yet, the architecture itself contemplates the possibility of ATF being brought under the GST regime. Section 5(2) of The Integrated Goods and Service Tax Act 2017 provides that GST may be levied on ATF on notification by the Central Government on recommendation of the GST Council. The reluctance of state governments to include ATF under the integrated tax system has rendered this provision ineffectual.

Cascading taxation

Aside from the state-to-state inconsistencies, other problems accompany the taxation of ATF under the VAT system. Without an integrated system like GST, there exist levels of payments and taxation under VAT. The airlines must pay central duties imposed in the form of excise duty and cess. Thereafter, state VAT is imposed on this total amount i.e., excise duty in addition to cost of fuel. A cascading effect in taxation is undesirable in the aviation industry as the profit margins of airlines is relatively narrow as compared to its international counterparts.

Input tax credit (ITC) is a mechanism constructed under GST that lets businesses offset the taxes they have already paid for primary goods as against the final product, and it can be availed only on inputs that fall within the GST regime. On top of the double taxation on ATF, due to VAT airlines cannot claim benefits under input ITC as well. This is especially crucial in the aviation industry due to its massive scale and various sub-industries (maintenance, spare parts, fuel, etc.). Offsetting tax on ATF against final tax on air fare would greatly improve the returns of airlines allowing for further investment in international aviation.

Access Constraints in International Aviation

Airlines in India need to procure ATF before they can compete in the market for domestic or international aviation services. The high, uneven VAT on fuel inflates their input costs at the outset whereas foreign carriers, having lower jet-fuel taxes, do not face this pre-market access penalty.

Under competition law, this barrier is similar to the essential-facility doctrine, where excessive pricing to an indispensable input can impede competition. Denial of market access is also recognized as an abuse under Section 4(2)(c) of the Competition Act 2002. The report on Competitive Framework of Civil Aviation Sector in India also notes that high fuel costs not only restrict growth of existing airlines but also deter new entrants. 

It has also been recognized that this high entry cost creates a disadvantage for Indian airlines. This distortion does not arise from a lack of efficiency on the part of domestic airlines, rather a systematic disadvantage in the access markets that prevents them from entering and sustaining competition in the main international market.  

Reforming ATF Taxation: The Way Forward

India’s aviation industry would greatly benefit from a reduction of tax rates on ATF. The GST framework was explicitly designed to unify such taxes across the country. As has already been recommended by a parliamentary Standing Committee, ATF can be brought under GST at up to 12% with full input-credit, allowing them to offset their taxes and reduce costs as explained above. 

An example can be taken of the US, who imposes a federal excise of only 4.3 cents per gallon on jet fuel and does not tax fuel carried for international flights under service agreements. Their tax structures lower the entry barrier into foreign markets and help domestic carriers gain scale abroad. India’s high and uneven ATF taxes raise the legal and economic cost of accessing foreign markets even before airlines enter them.

Although India has shown progress on the global stage by adopting the Cape Town Convention via the Protection of Interests in Aircraft Objects Bill 2025 which safeguards aviation financing, yet, improved creditor protection alone is not enough. Reforms are needed which can have a significant impact resulting in better market access, and therefore translating into competitive advantage.

Balanced Approach

While the case for a unified framework for ATF tax is strong, any reform must also account for the fiscal pressures face by state governments. ATF constitutes a significant share of revenue, about 20-30%, and is a very high-yield indirect tax framework under state control. Moving ATF completely under the GST framework would lead to substantial loss of revenue foe the states that currently charge VAT on it. 

A balanced approach is, thus, needed for the same. A Phased GST introduction is a possible solution where ATF could be first transitioned under GST just for international flights. This would allow states to maintain revenue from domestic flights while also allowing airlines to gain a better competitive standing on the global scale. Another approach can be a dual levy structure where ATF could be brought under GST up to a specific threshold of turnover, wherein states would still have the authority to levy VAT on it beyond that limit. This would not only preserve the fiscal autonomy of the state but also ensure that ATF taxation becomes less distorted for airlines.

Thus, a middle path would allow both states and the Union to “meet halfway” ensuring the growth of aviation industry, even in international markets. Subsequently, state fiscal autonomy would not be adversely affected by keeping their high-yield revenue similar to some extent.  

Final Descent: Key Takeaways

India’s aviation sector is at a defining moment as airlines like IndiGo aim of flying beyond domestic skies and venture into international markets. However, the current structure of ATF taxation imposes a disproportionate burden on airlines and restricts their ability to compete. With a uniform tax framework, airlines can access input-credit benefits, and resolve the disadvantages that currently distort market access. A balanced approach through a phased GST integration or a dual-levy model would preserve the financial revenue of the states along with benefiting Indian airlines. IndiGo’s expansion is both a challenge and an opportunity to bring reforms to the aviation sector. Thus, a reform to the tax structure is necessary to ensure success on the global field.