States in no hurry to cut VAT on petrol, diesel

On their part, the states ruled by Opposition are saying that since the Centre's excise cut has led to an automatic reduction in their taxes since their ad valorem taxes are levied on a base inclusive of central taxes, they have already effectively reduced their taxes.

Even though the Centre cut excise duty on petrol and diesel for the second time in seven months, Opposition-ruled states seem to be in no hurry to oblige with value added tax (VAT) cuts to give further relief to consumers.

The BJP-ruled states, which had reduced their taxes following last November’s tax cuts by the Centre, are seeking a reduction in VAT by states where the governments are led by Opposition parties. These states did not cut tax rates then.

On their part, the states ruled by Opposition are saying that since the Centre’s excise cut has led to an automatic reduction in their taxes since their ad valorem taxes are levied on a base inclusive of central taxes, they have already effectively reduced their taxes. A further cut in the tax rates would hit revenues hard, they point out.

Any rate cut by the states will lead to further reduction in the tax incidence. So, Kerala will lose Rs 2.41/litre on petrol and Rs 1.36/litre diesel while Rajasthan will lose Rs 2.48/litre on petrol and Rs 1.16/litre on diesel due to Saturday’s excise cut. As VAT rates vary from state to state, the impact of the central excise duty cut on VAT will also vary.

“Last time, all BJP ruled states further reduced prices by cutting VAT rates. This time, other party ruled states should think about this,” Goa chief minister Pramod Sawant said.

“The Union Government didn’t INFORM, let alone ASK for ANY state’s view when they INCREASED Union taxes on Petrol ~23 Rs /ltr (+250%) & Diesel ~29 Rs /ltr (+900%) from 2014. Now, after rolling back ~50% of their INCREASES, they’re EXHORTING States to cut. Is this Federalism?,” Tamil Nadu finance minister P Thiaga Rajan posted on Twitter in response to a tweet by finance minister asking states to cut VAT after the Centre reduced excise duty on Saturday.

The Centre on Saturday announced a series of steps to rein in the runaway inflation, which is threatening growth and leading to rupee’s sharp fall, besides being a burden on consumers. It cut excise duty on petrol by Rs 8/litre to Rs 19.1/litre and that on diesel by Rs 6/litre to Rs 15.8/litre to give relief to consumers, a move that would cost the central exchequer a massive Rs 1 trillion annually.

“The excise duty reduction has entirely been made in Road & Infrastructure Cess (RIC). Even in November 2021, the reduction of Rs 5/litre in petrol and Rs 10/litre in diesel was entirely made in RIC. Therefore, the entire burden of these two duty cuts (made in Nov, 21 and yesterday) is borne by the Centre (as cess is not shared with states),” Sitharaman tweeted on Sunday.

While the criticism of the states is understandable, they also gained after the Centre raised excise duties in the past. However, the gap between the central excise and and state VATs has narrowed considerably in the past seven months (see chart).

“PM Modi increased tax on petrol and diesel by Rs 26.77 and Rs 31.47 respectively in 12 instalments. He has reduced them by Rs 14.5 and Rs 21 so far. Roll back the remaining additional tax Rs 12.77 for petrol and Rs 10.47 for diesel before preaching moral high standards to states,” former Kerala finance minister Thomas Isaac tweeted.

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.