State levy stays high on fuel

The state levies on petrol and diesel will continue to remain high even after four states cut the value-added tax (VAT) on these fuels recently.

By Sambit Saha in Calcutta
  • Published 16.10.17

Calcutta: The state levies on petrol and diesel will continue to remain high even after four states cut the value-added tax (VAT) on these fuels recently.

Poll-bound, BJP-ruled Gujarat was the first to respond to the Centre's call to reduce state taxes on these fuels after the Centre rolled back the excise duty on petrol and diesel by Rs 2 each on October 3.

The excise duty cut on petrol and diesel was the first by the Narendra Modi-government since it assumed office in May 2014. Over the past three years, the government has raised the excise duty on petrol and diesel 11 times.

Congress-ruled Himachal Pradesh, which is also headed to the polls, and two other BJP-run states - Maharashtra and Madhya Pradesh - also cut their VAT rates, which puts other states, including Bengal, under pressure to follow suit.

However, in each of these states, VAT is only one of the components of the total levies that they charge.

Before VAT on petrol was cut from 26 per cent to 24 per cent in Mumbai, Navi Mumbai and Thane, the total state tax in Maharashtra was 47.94 per cent, largely because it charges Rs 11 per litre on petrol as surcharge.

Similarly in diesel, the tax was 28.41 per cent which included a VAT component of 24 per cent. This is because of the Rs 2 per litre surcharge. The Devendra Fadnavis-government reduced VAT on diesel by 1 per cent.

In Madhya Pradesh, too, 31 per cent VAT on petrol and 27 per cent on diesel were part of the total taxation on petrol and diesel at 38.90 and 30.24 per cent, respectively.

The Shivraj Chauhan-government not only slashed VAT by 3 per cent and 5 per cent on petrol and diesel, respectively, but also withdrew the additional surcharge of Rs 1.50 per litre on diesel.

In Gujarat where VAT was cut by 4 per cent each on petrol and diesel, the total incidence of taxation was higher than only VAT component. (See chart)

"A look at the states' revenue share from the petroleum sector, the bulk of which was contributed by auto fuels, tells the story of why there are multiple taxes on them. The revenue is stable and assured. Hence, policymakers do not want to tinker with them. But sometimes it optically does not look good to raise the VAT percentage. That is when elements like surcharge, cess and minimum prices are sneaked in," said an official with a national petroleum company.

Mamata move

If the domino effect of the tax cut on auto fuels gathers momentum, it may not be possible for the Trinamul Congress-government, which regularly earns political dividend out of populist policies, to avoid at least a token cut.

Mamata Banerjee's Bengal charges 25 per cent and 17 per cent VAT on petrol and diesel, respectively, which means the state imposes only a moderate tax on fossil fuels. On top of that, the state charges a Re 1 a litre cess on petrol and Rs 0.71 per litre on diesel.

However, the state has also set a floor price of Rs 13.12 a litre on petrol and Rs 7.79 a litre on diesel on account of the sales tax (VAT) collection, preventing prices from falling in tandem with global crude rates.

At present, state's VAT collection from these fuels is marginally higher for petrol and diesel from these prices. Consequently, a reduction in VAT rates alone will not be enough for Bengal to provide relief to the common man unless the administration cuts the floor price for these fuels. Bengal finance minister Amit Mitra declined to talk on the possibility of tinkering with state levies.

The state earned Rs 6,427 crore on account of VAT from petroleum products in 2016-17 compared with total receipts of Rs 30,156.05 crore earned from sales tax, representing 21 per cent. It may be fiscally imprudent to cut tax, given that Bengal is saddled with debt of over Rs 3 lakh crore. The repayments on a part of this debt will start from the next fiscal.

Compared to neighbouring states like Odisha, Bihar, Assam and Jharkhand, Bengal's tax burden on diesel remains the lowest. In petrol, Odisha attracts marginally more than Bengal. Hence, the possibility of revenue leakage to other states remains low.

GST conundrum

When the GST Council meets again in Guwahati on November 10, the discussions will focus on bringing petrol and diesel within the unified structure. Union petroleum minister Dharmendra Pradhan is pushing a proposal to bring auto fuels under GST to end the disparity in pump prices across the states.

During the formative years of this indirect tax reform, it was decided to keep liquor, petrol and diesel outside the ambit of GST. But earlier this year, the Narendra Modi government brought these fuels within the ambit of the new indirect tax but it was zero rated, which meant that states continued to tax them as before. Political observers say strong political consensus will be required to place them in a single tax bracket nationwide.