The union government has asked Maharashtra to drastically  reduce the 25 per cent sales tax levied on aviation turbine fuel.

It seems to have informally indicated that the state will receive the nod for the airport projects in Nagpur and Navi Mumbai in return for the tax cut.

Maharashtra collects Rs 120 crore (Rs 1.20 billion) annually through this levy. The state has agreed to schedule meetings with the Union civil aviation ministry to discuss a possible reduction in the levy.

Sunil Arora, chairman and managing director of Indian Airlines, said, "All airlines in the country have jointly approached the state government to implement a cut in the sales tax on ATF. We discussed the issue with the chief minister on Tuesday."

The Centre levies a 16 per cent excise duty on ATF for domestic flights.

This costs the aviation industry is Rs 250 crore (Rs 2.50 billion). In addition to this, states levy a sales tax, the average rate of which is 25 per cent now. Gujarat and Kerala charge the highest rates at 36 per cent and 34 per cent, respectively.

Recently, the Andhra Pradesh government has reduced the tax to 4 per cent from 30.55 per cent. Currently, the airlines buy ATF for domestic operations at Rs 19,500 per kilo litre compared with the international rate of around Rs 11,000 per kilo litre.

Indian Airlines, Air-India, Jet Airways and Air Sahara have proposed the withdrawal of excise duty on ATF apart from the categorisation of ATF as declared good in Central Sales Tax Act to cap the sales tax to 4 per cent.

According to Arora, rationalisation of taxes will have a marginal impact the government's finances.

"The impact of excise duty on domestic civil aviation industry is Rs 200 crore (Rs 2 billion) per annum. This is minuscule compared with the tax collected on oil sales, which is estimated at Rs 1,00,000 crore (Rs 1,000 billion)."

"Also, all the domestic carriers put together pay Rs 430 crore per annum as sales tax which accounts for only 0.42 per cent of the total sales tax collected."

On Tuesday, state government officials and Chief Minister Sushilkumar Shinde met at Sahyadri guest house to discuss the issue.

A senior official said: "Maharashtra has the third highest sales tax on ATF. The Centre may well point at Andhra Pradesh which has scaled down the levy to 4 per cent. The fact is that for Andhra Pradesh the annual collections through this tax amounts to only around Rs 10 to 14 crore (Rs 100 to 140 million)."

Earlier, when the state government acceded to the Union government's request to scrap the levy on international air carriers in 1994-95, it suffered an annual loss of Rs 140 crore (Rs 1.40 billion).

The Union government initially compensated this loss before suddenly discontinuing the practice.

"After the Centre stopped compensating the state government for the Rs 140 crore annual loss, on account of the sales tax on international air carriers being withdrawn, we resumed collecting the levy. In November 2002, the Union government enacted a law on the basis of international agreements that scrapped this sales tax. Now we are collecting sales tax on ATF from domestic carriers only, which is also being sought to be scaled down or scrapped by the Centre," the official said.

"Given the fiscal crunch faced by the state, scrapping the sales tax on ATF is inconceivable at this juncture, a point that was made out by the chief minister at Tuesday's meeting," he added.