Dealing with Fuel Price Rise

What is the issue?

Even amidst widespread opposition for petrol and diesel price rise, the government ruled out any immediate reduction in excise duty.

What is the response?

• The Centre has urged the states to take action.
• Andhra Pradesh announced a Rs 2 per litre cut in VAT on petrol and diesel.
• Rajasthan also announced a 4 percentage point cut.
• But states have been largely unenthusiastic in cutting down the excise duty.

How important is taxes on petrol and diesel?

• The Centre has had nearly Rs 2 to 2.5 lakh crore from excise duty on petroleum products in 2016-17 and in 2017-18.
• The states’ earnings through sales tax/VAT on petroleum products increased around Rs 1.6 to Rs 1.8  lakh crore from 2016-17 to 2017-18.
• Clearly, taxes on petrol and diesel are a key revenue source for both the Centre and states.
• Any reduction in this would significantly hit their fiscal position.

Will bringing it under GST help?

• LPG, kerosene, naphtha, furnace oil, and light diesel oil attract GST.
• But five other petroleum products lie outside the GST regime.
• These are crude oil, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel.
• But the Centre and the states are not fully ready to include these five petroleum products in the GST regime.
• Even if petrol and diesel are included under GST, prices are unlikely to fall.
• This is because of the GST principle of keeping rates close to the earlier tax rates.
• Also, worldwide trend suggests that if petrol and diesel are included in GST, states levy additional taxes to prop up revenue.

What can states do?

• Rates of state sales tax or Value Added Tax (VAT) vary from state to state.
• Unlike excise duty, VAT is ad valorem, and results in higher revenues for the state when rates move up.
• This is because taxes imposed by the Centre are specific i.e. fixed in terms of Rs per unit.
• On the other hand, the states tax the oil on ad valorem basis.
• This means that the tax is based on the assessed value of the commodity.
• So, with increasing petroleum prices, states' tax collection correspondingly goes up.
• Thus, the states could make a 10-15% duty cut and still get the same amount of tax revenue as budgeted.
• Therefore, the call for reduction in taxes on petroleum products applies more to the states than to the Centre.

Source: Indian Express