Flying in India: Why Your Airfare Is Paying for More Than Just the Seat

India’s aviation sector is experiencing significant growth, with domestic air traffic increasing by 11% year-on-year as of January 2025.IndiGo leads the market, holding a 65% share.   In spite of this growth, there remain numerous challenges ahead of the industry, primarily due to the high cost of operations driven by aviation taxes.

Aviation Turbine Fuel (ATF): A Major Cost Component

ATF accounts for approximately 40% of an airline’s operating expenses in India, a figure significantly higher than the global average. The hefty taxes levied on ATF are mostly to blame for this discrepancy. 

State-by-State Variations in VAT: Delhi maintains a high VAT rate of 25%, whereas 25 states and Union Territories have lowered the VAT on ATF to between 1% and 4% in an effort to encourage air connectivity. This has raised worries about flights moving to areas with lower taxes, such as Uttar Pradesh's soon-to-open Noida airport, which has a 1% VAT rate.

Exclusion from GST: The aviation industry has advocated for ATF's inclusion in the Goods and Services Tax (GST) framework in an attempt to standardize taxation. Following the Indian government commission's rejection of this plan in December 2024, the current tax structure was preserved.

High Airport Charges and Infrastructure Costs

Indian airlines have to pay substantial landing, parking, and navigation fees at airports in addition to fuel taxes. These expenses have a major effect on carriers' profitability and are among the highest in the world.

The lack of uniformity in these charges across different airports adds to the complexity and financial burden on airlines.

The market dynamics today

Despite all these challenges, the Indian aviation sector continues to grow:

• IndiGo Dominance: As of January 2025, IndiGo enjoyed a 65% market share, continuing to be the leading industry player.

• Emerging Players: Akasa Air is gaining traction and as of November 2024 occupied a 4.7% market share.

• Passenger Growth: In March 2025, domestic air travel increased by 8.79%, demonstrating strong demand.  

The Path Forward

● Tax Reforms: Simplifying taxes and reducing costs can be achieved by subsuming ATF under the GST regime.

● Infrastructure Development: By investing in airport infrastructure, congestion and operational inefficiencies can be minimized.

● Policy Uniformity: All carriers can compete on a level basis if airport charges are uniform all over the country.

At a juncture, the Indian aviation industry has to balance enormous operational issues with growth at a very fast pace. The long-term existence of the industry and affordability of air transport for the average Indian consumer rests on solving the issue of high taxation on ATF and airport services.