Lack of revenue avenues may have prevented some states from cutting value added tax (VAT) on petrol and diesel after the Centre cut taxes on auto fuels in November last year, especially after Covid adversely impacted their revenues and likely squeeze in resources after five-year GST compensation ends in June.
Taking cue from the Centre, which reduced taxes on petrol and diesel by Rs 5/litre and Rs 10/litre, respectively, effective on November 5, 2021, as many as 22 states and Union Territories had cut their sales tax/VAT rates on the two fuels. Though the state taxes are levied on an ad valorem basis as opposed to the Centre’s specific imposts, the tax cuts by the states/UTs were up to Rs 8.7/litre for petrol and Rs 9.52/litre for diesel.
On Wednesday, Prime Minister Narendra Modi named opposition-ruled Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala and Jharkhand for not reducing tax on petrol and appealed them to cut the duties to benefit the consumers.
While state governments run by BJP and its allies accorded the tax reliefs to consumers, Opposition-ruled states refused to toe the line, saying since it was the Centre which hiked the taxes steeply, it was incumbent on it to cut the taxes and not on the states. States have suffered significant erosion of their autonomous fiscal space due to various steps taken by the Centre in recent years, including the steep hikes in assorted cesses, the proceeds from which are not required to be shares with the states, the Opposition-ruled states argue.
Of course, the cut in central taxes will automatically translate into reduction in state taxes because the latter are levied on the base, inclusive of the Centre’s taxes. Any rate cut by the states will lead to further reduction in the tax incidence.
The disparity in tax collected from petrol and diesel by the Centre and states is visible from the trends in recent years. While the Centre’s tax revenues from the two fuels surged from Rs 2.25 trillion in FY18 to Rs 3.35 trillion in FY22, a growth of nearly 50% and has remained around Rs 3.35 trillion in FY22 despite a duty cut in November. The states’ revenues from the fuels grew from Rs 1.86 trillion in FY18 to Rs 2.52 trillion in FY22, a growth of 35%.
Moreover, the shareable part of the taxes has shrunk. For instance, while as much as 41% of the central taxes on diesel were shared with the states under the relevant formula in FY15, just 5.7% is currently being shared with the states, meaning the restructuring of tax rates has hugely benefited the Centre.
An analysis of data shows that while the Centre’s net tax revenue (post devolution) doubled since FY16, the devolution to states grew 66% during the period, due to rise in share of cess and surcharges that are not devolved (see chart). The sharper increase in the Centre’s net tax revenue is despite the fact that the 14th Finance Commission (FY16-FY20) raised the states’ share in divisible tax pool by 10 percantage points to 42%.
However, GST compensation cess though not part of the divisible pool, entirely goes towards compensating states for shortfall in GST revenues.
The highest state VAT is by the TRS-ruled Telengana, which levies a 35.2% tax on petrol and 27% on diesel, followed by the BJP-ruled Assam’s 32.66% on petrol and 23.66% on diesel (with rebates Rs 5/litre and an additional rebate of Rs 5.1/litre on both petrol and diesel), the YSR Congress party-ruled Andhra Pradesh levies a 31% VAT on petrol and Rs 22.25% on diesel (plus Rs 4 additional VAT and Rs 1 cess each on petrol and diesel) and the Congress-ruled Rajasthan levies a 31.04% VAT on petrol and 19.3% on diesel (plus road development cess on petrol and diesel).
Despite the duty cuts by the BJP ruled states, some of these states have very high VAT rates even now. BJP-ruled Madhya Pradesh levies a 29 % VAT (plus Rs 2.5/litre VAT and 1% cess) on petrol/litre and 19% VAT (plus Rs 1.5/litre VAT and 1% cess) on diesel/litre as on April 1, 2022.
Price build up of petrol shows that out of the retail prices of Rs 105.41/litre in Delhi, Rs 27.90 is central exise duty while Rs 17.13 is state VAT. Similarly, in diesel retail price of Rs 96.67 /litre, Rs 21.80 is central excise duty and Rs 14.12 is state VAT. Clearly, the auto fuel taxes are proving to be a goldmine for the Centre, which rolled out free grains scheme for the last two-and-a-half years as part of Covid aid to the poor. Since the scheme is on till September, it may not be in a position cut duties on the auto fuels further and so is asking the states to cut duties.