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Softening the blow on oil products consumers
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Sales tax on petroleum products provides a major cushion for the States when it comes to revenue generation.
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For once, most State Governments have fallen in line and come forward to reduce the sales tax or the Value Added Tax (VAT) on petroleum products. On an average, the States were levying between 30 and 33 per cent tax on petrol, and over 25 per cent on diesel.
While the Left-ruled States of West Bengal and Kerala led the way in announcing a tax reduction no sooner did Petroleum Minister Murali Deora came out with his price adjustment package, other States have followed suit. Thanks to the diktats from Congress President Sonia Gandhi and BJP President Rajnath Singh, the States governed by these two parties have agreed to lower their taxes. This would certainly help soften the burden on the consumer — the ‘Aam aadhmi’ or the average voter in an election year.
Past experience
But a deeper analysis of the State finances and past experience will only show that such a reduction in tax rates cannot be revenue neutral, in an isolated case. Experience has always shown that lower tax rates result in better compliance, and a reduction in slabs generally leads to higher revenue collections because of the volumes. This may be true not just for petroleum products, but has been demonstrated in the case of stamp paper duties on registration of properties.
But Finance Department officials in some of the southern States say that sales tax reduction cannot be seen in isolation. The Centre has projected a revenue loss of over Rs. 22,000 crore on account of reduction in excise and Customs duties. Of this, the States will take a 30 per cent hit.
There is also the subsidy on public transport because most State governments are unwilling to raise bus fares. Together, the States will lose substantially in lowering the sales tax or VAT on petroleum products.
Now, West Bengal set the ball rolling, announcing a reduction in sales tax on petrol from 25 per cent to 20 per cent and on diesel from 17 per cent to 12.5 per cent. The State generates about Rs. 2,000 crore from tax on just these two products. Andhra Pradesh has offered to take on the entire burden of the increase of Rs. 50 a cylinder of LPG, to benefit about 1.05 crore consumers in the State, many of whom enjoyed the free connection scheme introduced earlier. This may amount to directly subsidising the oil marketing companies. Andhra Pradesh will also reduce VAT on other products.
At present, the State charges a whopping 33 per cent on petrol and 22.25 per cent on diesel, earning (before this hike) Rs. 14.32 a litre of petrol and Rs. 7.03 a litre of diesel sold. Andhra Pradesh also collects a huge amount on natural gas sold in the State and, put together, its revenue from taxing the petroleum products amounts to a staggering Rs. 5,701 crore.
In the first list of Congress ruled States to come out with a tax cut were Delhi and Assam. In the National capital, the administration offered to forego VAT on LPG to enable the consumers in Delhi to bear a burden of just a Rs. 10 increase per cylinder - compared to the Rs. 50 announced by the Centre. Assam has reduced the price of petrol and diesel by one rupee a litre.
Other State cabinets have met subsequently to effect a marginal reduction in tax to soften the blow on the consumers. Tamil Nadu announced a 2 per cent lowering in tax on diesel alone, resulting in a price reduction of 60 paise a litre in the Rs. 3 hike announced by the Centre. It claimed to be losing Rs. 260 crore in tax revenue on this account.
Revenue neutral
Though none of the States, or the finance officials wanted to accept this openly, they do confess that the tax reduction will be revenue neutral over the year. “The projected revenue loss, either by the Centre or by the States, is notional. If the volumes remain high, we can expect the same revenue collection, or even more in a whole year.
For instance, instead of taxing 33 per cent on Rs. 50 a litre of petrol, we may tax 30 per cent on Rs. 55 and make up the anticipated loss. So long as consumption does not come down, there may be no actual loss in revenue,” explains a senior tax official. Obviously, diesel is a more sensitive product because it gets linked to the agriculture sector (farmers) and public transport. All the State Transport Undertakings will make out a case for increasing their fares, while the State governments will ask them to absorb the additional costs or even enhance the subsidy levels for them just to ensure that bus fares are not put up in an election year. When transportation costs go up, it has a cascading effect on inflation. Similarly, as farmers use diesel for generator sets and tractors, it becomes critical to soften the impact of the price increase on them.
The importance of sales tax/VAT on petroleum products is that it provides a major cushion for the States when it comes to revenue generation. Without any effort, they earn anywhere from Rs. 2,000 crore to Rs. 5,000 crore or more from the sales of these products, as it almost amounts to a tax deduction at source. It gets collected through the retail outlets and paid into the coffers without any fuss.
That is perhaps why the States have been reluctant to yield any ground on sales tax on these products, with the sales tax or VAT being the principal instrument of taxation and revenue for the States. The Empowered committee on VAT — of Finance Ministers from the States — will meet on June 16 to review VAT on petroleum products.
V. JAYANTH
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