Delhi And Mumbai Slash Aviation Fuel Taxes As Airlines Battle Surging Costs Amid Iran Conflict

Delhi reduced value-added tax on aviation turbine fuel from 25 per cent to seven per cent for six months, while Maharashtra cut Mumbai’s aviation fuel tax from 18 per cent to seven per cent for domestic flight operations. The decision is expected to significantly improve airline operating economics because the two metropolitan hubs account for a dominant share of India’s passenger traffic, international connectivity, and aircraft refuelling activity.

The tax reductions came after airlines warned the government that escalating fuel prices were threatening route viability across the country. In a formal communication sent to the Ministry of Civil Aviation on April 26, the Federation of Indian Airlines, representing Air India, IndiGo, and SpiceJet, stated that fuel costs had surged to between 55 and 60 per cent of operating expenses, compared to 30 to 40 per cent before the conflict intensified in West Asia.

The sharp increase followed disruptions around the Strait of Hormuz after tensions between the United States and Iran escalated. Nearly 20 per cent of global oil and liquefied natural gas supplies move through the strategic maritime corridor. Global jet fuel prices subsequently surged from 99.4 dollars per barrel at the end of February to 162.89 dollars per barrel for the week ending May 8, 2026.

Industry experts said the significance of the tax reduction lies not only in the rate cut itself but also in the locations where it has been implemented. 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 busiest airport in India. Mumbai airport handled 55.5 million passengers in 2025 and recorded more than 331,000 aircraft movements.

Together, the two airports form the backbone of India’s aviation network, handling a substantial share of premium domestic traffic, international operations, and airline hub connectivity. Airlines purchase enormous volumes of aviation fuel at these airports every day, making tax cuts in Delhi and Mumbai far more consequential than similar reductions at smaller airports.

Government data highlighted the scale of aviation fuel demand in the country. According to the Petroleum Planning and Analysis Cell, India consumed around 764 thousand metric tonnes of aviation turbine fuel in February 2026 alone. Directorate General of Civil Aviation data showed that domestic airlines carried nearly 167 million passengers in 2025.

Industry analysts stated that the concentration of aircraft refuelling activity at Delhi and Mumbai means even a marginal reduction in tax can generate substantial savings for airlines operating dense domestic and international networks.

Fuel expenses have now emerged as the biggest challenge for airlines already grappling with rising aircraft lease rentals, aircraft shortages, engine maintenance problems, and rupee weakness against the United States dollar. India’s aviation industry has repeatedly criticised the fragmented taxation structure on aviation fuel because aviation turbine fuel remains outside the Goods and Services Tax framework and attracts different tax rates across states.

The Federation of Indian Airlines had urged the central government to temporarily remove the 11 per cent excise duty on aviation turbine fuel and persuade states to lower value-added tax rates, which had reached as high as 25 per cent in Delhi and 29 per cent in Tamil Nadu before the latest reductions. Tamil Nadu continues to impose the country’s highest tax on aviation fuel at 29 per cent, followed by West Bengal at 25 per cent.

The financial pressure is already visible in airline performance. Air India has suspended international routes to Chicago, Newark, and Shanghai while reducing flight frequencies to San Francisco, Paris, and Toronto. IndiGo’s net profit fell 77.6 per cent year-on-year to Rs 549 crore in the third quarter of the 2025-26 financial year amid rising fuel and operational expenses.

The tax cuts are also expected to influence airline operational planning and refuelling strategies. For years, airlines have relied on “fuel tankering”, a practice in which aircraft carry extra fuel from lower-tax airports to avoid refuelling at expensive hubs. While financially beneficial, the practice increases aircraft weight and reduces fuel efficiency. Industry experts said lower fuel taxes in Delhi and Mumbai could reduce the need for such tax-driven operational distortions and improve route economics.

Airlines with extensive hub operations in Delhi and Mumbai, particularly IndiGo and Air India, are expected to gain the most from the reduction in fuel costs. Even a decrease of a few rupees per litre can translate into substantial annual savings when applied across large airline networks.

Despite the reductions in aviation fuel taxes, passengers are unlikely to see immediate cuts in airfares. Aviation pricing in India is driven primarily by demand and supply conditions rather than direct cost pass-through. Directorate General of Civil Aviation data has consistently shown strong passenger demand despite operational disruptions and capacity shortages. At the same time, supply remains constrained because of grounded aircraft, engine inspection requirements, and delivery delays from manufacturers.

This imbalance has strengthened airline pricing power on several domestic sectors, especially routes connecting major metropolitan cities. Analysts believe the tax reductions may help airlines absorb mounting cost pressures and protect profit margins rather than significantly reduce ticket prices.

The broader inflationary environment continues to remain difficult. Petrol and diesel prices were recently increased again by Rs 3.9 per litre, indicating that energy-related cost pressures remain severe across multiple sectors of the economy.

Some analysts believe airlines may gradually introduce more competitive fares on busy domestic routes if global fuel prices ease further. However, sustained reductions in ticket prices would likely require a major decline in global crude oil prices and de-escalation of tensions in West Asia.

Under Maharashtra’s revised taxation structure, the seven per cent value-added tax applies only to domestic operations. International carriers operating from airports in Maharashtra were already exempt from aviation fuel tax.

Both Delhi and Maharashtra have acknowledged the significant fiscal impact of the decision. Chief Minister Rekha Gupta stated that Delhi could lose nearly Rs 985 crore in revenue because of the tax reduction but argued that the move would strengthen the capital’s position as a competitive aviation hub. According to Gupta, value-added tax on aviation turbine fuel contributes around Rs 1,368 crore annually, accounting for nearly 19 per cent of Delhi’s total yearly value-added tax collection.

Maharashtra officials estimate that the state could lose between Rs 550 crore and Rs 600 crore annually because of the revised taxation policy.

The latest tax reductions have once again revived the aviation industry’s long-standing demand to bring aviation turbine fuel under the Goods and Services Tax framework. Aviation turbine fuel has remained outside the Goods and Services Tax system since its implementation in 2017, preventing airlines from claiming input tax credits on fuel purchases.

Airlines argue that varying state-level tax structures distort operational costs, complicate route planning, and inflate fuel expenses across the sector. Despite repeated demands from the aviation industry, the central government has so far made no announcement regarding the inclusion of aviation turbine fuel under the Goods and Services Tax framework.

The tax cuts by Delhi and Maharashtra mark one of the most significant interventions in India’s aviation sector in recent years, coming at a time when airlines are facing mounting pressure from global geopolitical instability, surging fuel prices, weakening currency conditions, and persistent operational disruptions. The decisions are expected to reshape airline cost structures, refuelling strategies, and competitive dynamics across India’s rapidly expanding aviation market.