Coronavirus lockdown 3.0: States up taxes on auto fuels, liquor for income

By: and |
May 06, 2020 3:30 AM

At least 13 states hike VAT on petrol/diesel since mid-March, many make liquor costlier with new imposts.

Delhi came out with a hefty corona tax of 70% of MRP on liquorDelhi came out with a hefty corona tax of 70% of MRP on liquor

State governments are increasingly employing the two principal income-generating tools at their disposal – value-added tax on auto fuels and excise on liquor – in an attempt to cushion the body blow to their revenues dealt by the pandemic. Since the lockdown began in the last week of March, at least 13 states, including Maharashtra, Tamil Nadu, Karnataka, Rajasthan and West Bengal, have increased the value added tax/sales tax on these fuels by rates that correspond to retail price increases ranging from Rs 1-6/litre for petrol (Rs 0.5-5/litre for diesel).

For perspective, retail rate of diesel in Delhi on Tuesday was Rs 69.39/litre, while petrol was sold in the city at Rs 71.26/litre.

The fuel tax increases effected by the states, it may be noted, are over and above the additional levy of Rs 3/litre on these fuels announced by the Centre on March 14 to raise some Rs 40,000 crore annually. The central fuel taxes boost the states’ coffers too, as the state levies are on the prices inclusive of central imposts.

Haryana, Assam, Goa, Tripura, Nagaland, Arunachal Pradesh and Meghalaya are the other states that have recently raised fuel taxes to find resources for combating Covid-19. Many more states are likely follow suit soon, as the relaxations in lockdown guidelines have increased the utility of such tax hikes.

Increases in alcohol excise/taxes have been announced by at least three states. As soon as the liquor outlets were opened as part of the relaxation of the Centre’s lockdown guidelines, Delhi came out with a hefty corona tax of 70% of MRP on liquor; Andhra Pradesh, which had raised the tax on alcohol by 25% of MRP earlier, imposed another 50% of MRP levy on Tuesday. The excise duty hike could fetch the southern state an additional Rs 9,000 crore revenue in FY21. West Bengal, one of the most trenchant critics of the Centre for its alleged non-generous attitude towards the states in this time of crisis, has announced a 30% impost on liquor. Rajasthan is also considering a proposal to levy special 15% tax on MRP of alcohol.

To boost revenues while enforcing social-distancing, the Chhattisgarh government has launched a web portal for home delivery of liquor in green zones of the state. Uttar Pradesh is also learnt to be contemplating a hike in alcohol taxes in the form of a special excise duty.

In fact, Rajasthan was the first to hike the fuel taxes after the Covid-19 outbreak. The Congress-ruled state hiked taxes on diesel and petrol by around Rs 2.2/litre each on March 22, two days prior to the start of the nationwide lockdown, and again raised the taxes by Rs 0.5-1.1/litre later during the lockdown. The latest to follow the line is the city-state of Delhi, which upped VAT on diesel from 17% to 30% and that on petrol from 27% to 30%.

Fuel and alcohol taxes are crucial for the states in terms of revenue. Sales tax/VAT on petroleum products are 15-20% of the states’ own tax revenue (OTR) while 10-15% of OTR comes from levies on alcohol for human consumption. State GST makes up for some 45% of the OTR, which itself is 62% of the states’ overall tax receipts, the balance being Central transfers.

Among themselves, the states were budgeted to collect Rs 2.69 lakh crore from petroleum taxes in FY20 and Rs 1.75 lakh crore form excise/other levies on alcohol.

With instances of financial support from the Centre being few and far between, and Covid-19 pandemic almost drying up their own revenue streams amid increased expenditure obligations, the states have no option but to use the tax tools with them. Raising GST rates is now not easy as it requires consensus at the GST Council.

Of course, the retail prices of petroleum products are not linked directly to global crude oil price but are supposed to be determined on the basis of a formula of trade parity pricing (80% weight to landed cost of notional import of petroleum products and 20% to export price of petroleum products). However, the oil marketing companies have not been strictly following this formula, reason why retail auto fuel prices have hardly moved in tandem with the Indian basket of crude in recent months. Taxes if any imposed by the Centre and states, are duly passed on to the consumers.

Though crude prices have fallen 32.5% since March 16, retail prices of petrol and diesel remained unchanged in Delhi till May 4. Diesel price in Delhi rose 11.4% on Tuesday.

As reported by FE recently, state governments have collected the lowest-ever inflation-adjusted monthly tax revenue in April. Officials from over half a dozen states told FE that their states’ OTR in the lockdown month were less than a fourth of the usual (estimated) level, with some putting the figure at even 10%. While this has indeed undermined their ability to sustain the Covid-19 related additional expenditure, the Centre’s decision to release the states’ share of divisible tax pool without any reduction from the budgeted level has come as a solace to them. Of course, a clutch of them has resorted front-loading of market borrowings and some with relatively worse balance sheets, have borrowed at exorbitant costs.

The Centre has already transferred Rs 46,038 crore to the states as their share of central taxes in April.

In view of the decline in tax revenues, Maharashtra on Monday announced spending compression of Rs 70,000-100,000 crore on various schemes announced in its FY21 budget.

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