Petroleum minister Murli Deora has asked the state governments to lower and rationalise the value added tax (VAT) that they levy on petrol and diesel as a percentage of the retail price.
States level VAT on a litre of petrol and diesel, which are in some cases as high as 33% and 24.7% of the retail prices, respectively. This causes an automatic rise in state taxes whenever the Centre raises the prices of these products to salvage state-owned fuel refiners IOC, BPCL and HPCL from the rising global crude oil prices.
This amplifies the consumer impact of the Centre?s decision to increase the price of petrol and diesel, which indirectly benefits state governments. It also restricts the Centre?s ability to increase the price of the subsidised fuel whenever a price increase becomes necessary due to the country?s dependence on costly, imported crude oil. India imports nearly 70% of its crude requirement.
Deora also urged the chief ministers of state governments to move away from ad valorem tax rates (as a percentage of the price) to specific duty (in rupee terms per litre), the way the Centre has already done. This is essential to avoid a cascading effect of a fuel price increase on the consumer.
?At a time of rising prices, ad valorem taxes have a cascading impact on the retail price of petroleum products. To address this issue, the ad valorem component of the VAT can be converted into a specific component, at the current levels?, a petroleum ministry statement said quoting Deora.
?A rise in the international oil price exerts an upward pressure on domestic prices of petroleum products…Ad valorem rates of VAT imposed by the state governments further aggravates the impact of international oil prices on the consumer?, the statement quoted the minister. He also said the current high levels of state taxes on fuel is unsustainable considering the government?s obligation to protect the poor from the rising prices.
The Centre is now consulting the members of the ruling coalition such as DMK and Trinamool Congress on various options of deregulating and raising fuel prices to protect the interests of refiners and upstream companies that bear part of the subsidy burden along with the Centre.
However, the Centre itself had, in this year?s Union Budget, raised the taxes on fuel, as it revoked the duty cuts made in June 2008 when global crude price scaled historic heights. Finance minister Pranab Mukherjee restored the basic duty of 5% on crude petroleum, 7.5% on diesel and petrol and 10% on other refined products. He also raised the central excise duty on petrol and diesel by Re 1 per litre each.