allow states to levy extra taxes in a limited way over and above the the proposed goods and services tax (GST) in lieu of the latter agreeing to subsume petroleum products within the proposed comprehensive
Whats triggered the rethink are the practical difficulties of having a special tax component for petroleum products on which no input tax credit facility would be available to businesses. Input tax credit is a vital element of GST, which is a destination-based tax on consumption that would eliminate cascading of taxes in B2B transactions.
According to sources, some of the states too have found merit in the view that an additional non-Vatable impost on petroleum products is impractical. The realisation has induced the Union and state ministers to explore new ways to compensate states for their likely revenue losses in the GST regime and the perceived erosion of some of their fiscal autonomy.
Petroleum products on which sales tax is levied at the state level account for 30-40% of states revenue kitty at present.
Sources said the issue would figure at a meeting of the empowered committee of state finance ministers scheduled for next month in Shillong. They added that any delay in arriving at a consensus on including petroleum and alcohol in GST is also likely to make it difficult for the Fourteenth Finance Commission to finalise its recommendations.
A major element of the Finance Commissions mandate is to evolve a formula for devolution of gross central tax revenue to states. The compensation formula for states including any leeway in tax rates is integral to the determination of the revenue-neutral rate (RNR) for state GST.
The Commission which must assess the impact of GST on the finances of Centre and states and suggest a mechanism for compensation in case of any revenue loss was expected to give its report on October 31, but it is unlikely to meet that deadline. The Commission, led by former RBI Governor YV Reddy, is mandated to make recommendations on Centre-state fiscal relations for five years from April 1, 2015.
Currently, as per the 13th Finance Commission, 32% of the net proceeds of Centres shareable tax proceeds goes to states.
At present, some of the petroleum products such as petrol and diesel do not get input tax credit facility on central excise duty as petrol is used by individual consumers who do not require such a facility while diesel has industrial as well as individual consumers, making it difficult to give the benefit. VAT rules vary from state to state.
R Muralidharan, executive director, PwC, explained that the central governments earlier proposal was to have two components of tax on petroleum products, one with input tax credit facility and the other without. State finance ministers have earlier this month opposed the inclusion of petroleum products in GST, deviating from an earlier consensus with the Union government. If petroleum products are non-VAT-able, then the chain of input tax credit breaks. Refineries will have some products with input tax credit and some others without. It would increase the labour of maintaining records, said Muralidharan.
Having a non-VATable tax on petroleum products will lead to cascading of taxes as manufacturers will not be able to adjust the taxes paid on inputs against their final tax liability. The Centre now wants simpler solution to the possible revenue losses to states without increasing the compliance burden of businesses.