VAT’s the issue? FM pushes states to reduce tax on petrol, diesel

by Nilesh Wadhwa 06 Oct 2017


Following the Rs 2 per litre excise duty cut on petrol and diesel on October 4 aimed at pacifying motorists in the country, who have had to contend with spiraling fuel prices, finance minister Arun Jaitley has asked state government to also follow suit to provide further relief to consumers. Unlike the Centre, states levy VAT as an ad valorem duty which rises every time there is an increase in price.

As per a PTI report, Jaitley said, “Now it is up to state governments if they are concerned with the issue (to cut sales tax or VAT). The BJP-led NDA governs 18 out of the 29 states. Referring to opposition-ruled states, he said some state governments, particularly in Kerala and Delhi, were at the forefront of demanding a cut in duties. "And therefore state governments must really look at their own VAT collections," he said. Jaitley added that a large part of the taxes collected on petroleum products go to the states. Apart from their own VAT collection, they also get 42 percent of central duties.

Who charges what?
While Maharashtra levies 46.52 percent VAT (47.64 percent in Mumbai) on petrol, the highest in the country. Andhra Pradesh has 38.82 percent VAT on petrol while Madhya Pradesh levies 38.79 percent VAT on the fuel. Delhi and Himachal Pradesh levy 27 percent VAT on petrol while Punjab has 36.04 percent VAT. Haryana levies 26.25 percent VAT.

Jaitley said states must also bear a part of the impact, he said, adding that the revenues of both the Centre and state governments would be impacted by duty cuts but an upward movement in the economy would give adequate space for covering up of the lost revenue.

In New Delhi, oil minister Dharmendra Pradhan said states should cut sales tax or VAT on petrol and diesel by 5 percent. "We have proactively cut excise duty. Now it is the turn of states to reduce VAT," Pradhan.

Between November 2014 and January 2016, the Centre had raised excise duty by Rs 11.77 per litre on petrol and Rs 13.47 a litre on diesel, which essentially meant that millions of motorists in the country could not benefit from the plummeting international crude oil prices.

Windfall gains for the government
The recent Rs 2 per litre excise duty cut, according to the government, will result in a revenue loss of about Rs 26,000 crore in a full year, and about Rs 13,000 crore during the remaining part of the current fiscal. However, what remains unsaid is that there have been windfall gains as taxes on petroleum products are a cash cow for both the Central and State governments.

In plain economics, globally, the fuel market has always seen a monopolistic situation – while the consumer may have retail options to choose where he/she buys the fuel, the production and supply control always remains with the government or the ruling power at the time.

A close look at the various taxes collected by the government over the past three fiscal years and Q1 of FY2018 reveal the humungous amount of revenue netted (see detailed table below). In 2016-17, Cess (Rs 13,285 crore), Customs (Rs 9,521 crore), Excise (Rs 242,691 crore), Service Tax (Rs 2,956 crore), other charges on crude oil and petroleum products (Rs 399 crore), plus royalty of Rs 4,649 crore means the Central government alone received total revenues of Rs 273,502 crore.

The state governments had their share too, netting total revenue of Rs 189,587 crore in 2016-17. A break-up of this amount shows that the state governments got royalty on crude oil/gas (Rs 11,942 crore), sales tax/VAT (Rs 166,378 crore), octroi duties including electricity (Rs 3,524 crore), and entry tax/others (Rs 7,742 crore).

That’s not all. Apart from the cess and taxes, both the Central and State governments also get dividends or income tax selling on the sale of petrol products. In 2016-17, the central government got a dividend of Rs 61,032 crore, while state governments got Rs 183 crore. A total of Rs 524,304 crore was the contribution to the exchequer just from the petroleum sector in FY2016-17 – work the math and it’s Rs 43,692 crore a month, Rs 1,456.4 crore every day or Rs 60.68 crore per hour!

Along with burning a hole in motorists’ wallet, high fuel prices, more importantly, also drive up inflation across the board, hitting the populace and industry across the country. A consolidation or revisiting of the taxation policy on petroleum products in India is called for. Bringing fuel prices into the GST fold could ensure uniform pricing across the country.


Source: PPAC

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