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States’ ‘tax cuts’ on petrol, diesel automatic, no rate reduction by them

While the Centre’s taxes on auto fuels are in the form of specific duties (volume-based), state taxes are a combination of ad valorem and fixed rates.

Finance minister Nirmala Sitharaman on May 21 tweeted that as a result of the excise duty cuts, the retail prices will come down by Rs 9.5/ litre for petrol and by Rs 7/litre on diesel. (Reuters)

The cut in excise on auto fuels by the Centre has led to an automatic reduction in state taxes on fuels. However, no state has reduced the rates of VAT/sales tax, following the Centre’s move. This is because state taxes on auto fuels are levied mostly on an ad valorem basis on base price inclusive of the Centre’s taxes and dealers’ commissions.

While the Centre’s taxes on auto fuels are in the form of specific duties (volume-based), state taxes are a combination of ad valorem and fixed rates.

Following the tax cuts by the Centre last Saturday, Maharashtra, Rajasthan and Kerala said their taxes on the fuels, too, came down as a result. But they were merely referring to the reduced tax as a result of the Centre’s move rather than any rate cut. The Centre reduced excise on petrol by Rs 8/litre and that on diesel by Rs 6/litre.

Finance minister Nirmala Sitharaman on May 21 tweeted that as a result of the excise duty cuts, the retail prices will come down by Rs 9.5/ litre for petrol and by Rs 7/litre on diesel. So, the extra reduction will be around Rs 1.5/litre for petrol and about Rs 1 for diesel as the impact will vary from state to state and from city to city.

In Mumbai, for instance, Maharashtra levies VAT at 26% plus Rs 10.12/litre additional tax on petrol and 24% VAT plus Rs 3/litre additional tax on diesel. On May 22, the Maharashtra government tweeted that the state has slashed the VAT on petrol by Rs 2.08/litre (26% of the Rs 8 excise cut) and diesel by Rs 1.44/litre (24% of the Rs 6 excise cut in diesel) which will cost the state Rs 2,500 crore annually. In Mumbai, the retail price of petrol came down from Rs 120.51/litre on May 21 to Rs 111.35/litre, a difference of Rs 9.16 where as the excise duty cut was Rs 8.

In fact, the state’s VAT collection automatically came down by Rs 1.16/litre (not Rs 2.08 as claimed) as fixed amount of tax per litre remained unchanged while the ad valorem portion changed.

Similarly, Kerala said it 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 after the Centre’s excise cut. On Sunday, Kerala finance minister KN Balagopal ruled out any cut in Kerala’s tax rate, “as it was against the interests of the state”.

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. Any rate cut by the states will lead to a further reduction in the tax incidence.

“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 tweeted in response to a tweet by finance minister asking states to cut VAT after the Centre reduced excise duty on Saturday.

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.

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 (mostly BJP-ruled) 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.

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