New Delhi, June 10: The government is working on a bargaining plan to get states to give tax concessions on petrol and diesel and match them by a similar cut in central taxes, thereby reducing its fuel subsidy burden.
North Block wants states to cut taxes on petrol and diesel, which is as high as 33 per cent in some cases. VAT or value-added tax, which goes up with every increase in fuel prices, ranges from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel taxes.
Finance minister Pranab Mukherjee was recently quoted as saying after the recently held Congress working committee meeting that he would like states to cut fuel taxes by up to 25 per cent.
Goa recently slashed taxes to make petrol cheaper by Rs 11 at a tad over Rs 61 a litre, proving that the stance of state finance ministers that taxes cannot be cut is perhaps just an excuse.
Mukherjee said he had sought co-operation from states in making a “sacrifice” of tax revenue to help bring down the prices of petroleum products.
“I have written to chief ministers of various states, indicating how much revenue is collected by respective states and how much revenue is collected by the central government in the form of excise duty from that state,” Mukherjee had said.
The Centre, which earns about Rs 14.78 as excise on a litre of petrol and diesel, would of course by the same logic be forced to cut and cap taxes.
Mukherjee gave enough indications that he was willing to consider this as part of the bargain with states to reduce the subsidy on diesel.
Once taxes on petrol and diesel are reduced, it will give oil retailers a window to raise the base price of diesel, reducing the subsidy needed per litre while keeping the end-price the same for consumers.
As a bonus, petrol prices could become cheaper for consumers with falling taxes.
Recently, petrol prices were hiked by Rs 7 per litre, which was later revised to a Rs 5-per-litre increase.
The government may call a meeting of state ministers on the issue to try and work out a solution. If states ignore the Centre’s plea, the government’s strategy could be to get Congress-ruled states to take the first step to cut taxes. The huge difference in prices among states will create pressure in favour of tax reforms.
The Centre needs to cut subsidies on diesel as the wide fluctuations in crude prices can derail its subsidy bill, which has been budgeted at Rs 190,000 crore for the current fiscal. This amount is meant for food, fertiliser and fuel subsidies. However, fuel subsidies have risen so sharply that they could eat up almost the whole of the subsidy outlay, leaving little or nothing for other products.
The estimated subsidy bill for the current fiscal for diesel, LPG and kerosene — the three fuels for which the government is supposed to provide hundred per cent cash compensation — is estimated at about Rs 2 lakh crore against Rs 1,38,800 crore last year.
Diesel prices were last raised on June 25, 2011. Since then, global crude prices have gone up significantly, while the Indian rupee’s value has fallen over 20 per cent to the dollar.
The under-recovery on diesel has gone up from Rs 6.13 a litre last June to Rs 14.29 a litre now. The under-recovery for LPG has gone up from Rs 331.13 a cylinder to Rs 570.50 a cylinder.