Many States reluctant to cut fuel tax

They call for further cuts in Union taxes; Maharashtra bites fuel tax bullet 

May 22, 2022 10:11 pm | Updated May 23, 2022 12:24 pm IST - PUNE/HYDERABAD/CHENNAI/JAIPUR/CHANDIGARH/KOLKATA

Finance Minister Nirmala Sitharaman had reiterated Prime Minister Narendra Modi’s plea for States that had not cut their fuel taxes to do so now.  File

Finance Minister Nirmala Sitharaman had reiterated Prime Minister Narendra Modi’s plea for States that had not cut their fuel taxes to do so now.  File | Photo Credit: The Hindu

The Maharashtra government pared its value added tax (VAT) levies on petrol and diesel by ₹2.08 and ₹1.44 per litre respectively on Sunday, a day after criticising the Centre for offering minimal tax cuts after drastic hikes over its tenure, a sentiment echoed by most Opposition-ruled States.

Telangana Finance Minister T. Harish Rao termed the Centre’s partial reduction of the cess levied on petroleum products ‘bogus’ and ‘humbug’, and joined his Tamil Nadu counterpart P.T.R. Palanivel Thiagarajan in calling for further cuts in the Union taxes as they had been hiked sharply since 2014.

After announcing the excise duty cuts on petrol and diesel of ₹8 and ₹6 per litre on Saturday, Finance Minister Nirmala Sitharaman had reiterated Prime Minister Narendra Modi’s plea for States that had not cut their taxes since November 2021 — when the Centre announced the last round of tax cuts — to do so now.

Mr. Thiagarajan termed this an ‘unfair and unreasonable’ expectation, in an elaborate statement on the issue on Sunday, while Rajasthan Chief Minister Ashok Gehlot pointed out that the Centre’s excise duty cuts were followed by ‘a sudden increase’ in petrol prices by 71 paise per litre on Sunday. “The reduction in excise duty will become irrelevant in the next few days if the fuel prices are increased in this manner,” Mr. Gehlot said.

Karnataka Chief Minister Basavaraj Bommai said he would consider if duty cuts were feasible, while the Aam Aadmi Party (AAP), which now administers Delhi and Punjab, and the Trinamool Congress did not issue any official communiques on their stance. In response to the Prime Minister’s plea for States to cut taxes, Chief Minister Mamata Banerjee had said last month that would be possible only if Centre cleared its pending dues of about ₹97,000 crore.

Cascading effect

Both Mr. Gehlot and the Tamil Nadu Finance Minister pointed out that States were already losing revenues due to the Centre’s tax cuts, which had a cascading effect on their effective levies.

“The Centre should reduce the excise duty on petrol and diesel to the level of the UPA government to provide relief to the common people in the real sense, as such a decision would bring down the fuel prices to less than ₹70 per litre,” Mr. Gehlot said, a demand backed by Mr. Rao.

The Centre still levied a cess of ₹7.40 a litre on diesel and ₹16.40 a litre on petrol and the State would appreciate if it rolled back the cess on diesel to ₹3.46 a litre which prevailed in March 2014, Mr. Rao asserted. By contrast, his government had left the VAT on these products unchanged since assuming office in 2014, he pointed out.

“It was neither fair nor reasonable to expect the States to reduce their taxes on fuel since the Union government had never consulted them while increasing the taxes multiple times,” said Mr. Thiagarajan, noting that the reduction in Central excise duties would result in an additional loss of around ₹800 crore in annual revenue to the State, in addition to the ₹1,050 crore loss from the cuts announced in November.

Though the DMK government inherited a precarious fiscal position and incurred an additional expenditure towards COVID-19 relief activities, it reduced the VAT on petrol in a few months after assuming office even before the Centre’s November 2021 reductions.

Manifold increase

In the past seven years, the Union government’s levies on petrol had gone up substantially, resulting in a manifold increase in its revenues, but the States did not see a matching increase in their revenues. “This is because the Union government has increased the cess and surcharge on petrol and diesel while reducing the basic excise duty that is shareable with the States,” the Minister said.

With the recent cuts, the Union government’s taxes on petrol were ₹19.90 a litre and ₹15.80 a litre for diesel, but was still higher than the 2014 rates by ₹10.42 a litre on petrol (₹9.48 a litre in 2014) and ₹12.23 a litre for diesel (₹3.57 a litre in 2014), he said, adding that there was a “strong case” for the Union government to further reduce its taxes.

“It is pertinent to point out that the Union government had never consulted the States when it increased the taxes on petrol and diesel multiple times. The exorbitant increase in taxes by the Union government has been only partially reduced through the cuts and the taxes continue to be high, compared with the 2014 rates,” Mr. Thiagarajan said.

‘Not enough’

AAP spokesperson in Punjab, Malwinder Singh Kang, said the Central government’s reduction of excise duty on diesel and petrol was not enough and demanded a further reduction in the excise duty.

“The Central government should have reduced the excise on diesel and petrol by at least ₹20 and ₹25 per litre respectively. Punjab is already under a severe financial crisis. The State had already reduced the Value Added Tax on petrol and diesel to an extent what it could have done,” Mr. Kang told The Hindu.

The Maharashtra government said it expects to lose ₹80 crore on petrol and ₹125 crore on diesel a month due to the VAT cuts, which will translate into an annual revenue loss of ₹2,500 crore.

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