Airlines in India will be greatly relieved if jet fuel is brought under the goods and services tax (GST), industry experts said on Wednesday, as they backed the civil aviation ministry’s proposal to the federal indirect tax body, the GST Council.

High fuel costs is a key factor in the worsening financial health of carriers, exacerbated by a weaker rupee. Fuel comprises about two-fifth of the cost of running an airline in India.

Experts said including fuel in GST will benefit airlines in two ways.

“It is expected that the GST rate will be moderate on jet fuel and since fuel is a major input, the benefit of input tax credit will be available to airlines,” said R. Muralidharan, senior director at Deloitte India.

Attempts to bring jet fuel under GST however faces an uphill challenge as state governments are reluctant to accept the proposal as it will result in moderation of taxes and loss of revenue.

In the three months through June, fuel comprised 40% of overall costs to ₹2,715.6 crore at InterGlobe Aviation Ltd, which runs India’s largest airline IndiGo.

Airlines currently bear the burden of value-added tax (VAT) levied by states, ranging between 15% to 24%. The tax is cost to airlines as they can’t offset it against the GST they pay for their air transport services.

The civil aviation ministry is considering ways on how to ease the industry’s pain of high fuel costs though it is aware that the aviation industry is a deregulated where the government operates at an arms-length basis.

Civil aviation minister Suresh Prabhu said on Tuesday that carriers are struggling with high fuel costs not just in India, but across the world.

“Fuel is an important variable cost for airlines. We are aware of the situation,” he said, without elaborating.

Civil aviation secretary R.N. Choubey said if the GST Council decides to bring jet fuel in GST, it will be a big relief to the industry.

The GST Council is yet to discuss the ministry’s proposal.

The ministry is also working with the finance ministry to ease rules on external commercial borrowing so that airlines can borrow abroad for their working capital requirements.

In recent months, high fuel costs, a depreciating rupee and intense competition has hit domestic airlines.

Jet Airways, for example, had reported a net loss of ₹1,036 crore in the fourth quarter of FY18 that wiped off the profits made in the first three quarters. The company ended FY18 with a loss of ₹767 crore as spending, mainly fuel costs, employee benefits and distribution expenses, overshot revenues.

Last month, IndiGo posted a drop in quarterly profit of 97%, its biggest-ever since going public in 2015, to ₹27.79 crore, Mint reported on 30 July.