In a discussion paper posted on its website, the Civil Aviation Ministry has proposed to abolish the service tax on air tickets and reduce sales tax on aviation fuel from an average 25% to a uniform 4%, reports said.

The aviation sector has been plagued with a debt load of $20bn and annual losses of $2bn due to soaring fuel costs, taxes on fuel and price wars due to intense competition.  

Different states impose sales tax at varying rates on jet fuel, some going as high as 30%. Aviation turbine fuel accounts for 40% of Indian carriers' costs as against the global average of 20%.

"Reduction in the fuel tax would allow the Indian carriers to become competitive in servicing passengers to their respective hubs within India and compete with international carriers. This advantage would allow them to increase their market share," the paper said.

The ministry has also proposed to abolish service tax on air tickets, which according to the paper, makes air travel "a luxury rather than an efficient mode of transport."

Airfares on major domestic and international routes have shot up 30-50% during April-May mainly because of the Air India pilots' strike and the chaos at Kingfisher Airlines.

While a decision to allow Foreign Direct Investment of up to 49% in domestic airlines by foreign carriers has to still see the light of day, the government has already allowed airlines to directly import jet fuel which could reduce the carriers’ costs by 15-20%.

In India at present, foreign carriers are prohibited from making direct investments into the aviation sector, however, financial and non-airline investors can invest up to 49% in the sector.