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Across the Aisle by P Chidambaram: Rob Peter more, pay Peter less

On May 21, the Finance Minister announced that the government had decided to reduce the “excise duties” by Rs 8 per litre on petrol and Rs 6 per litre on diesel.

fuel tax
In the last few days, there has been another flash point: who is doing more to cut taxes? (PTI)

Last week, I had written that ‘Centre-states relations have never been so fraught’. In the last few days, there has been another flash point: who is doing more to cut taxes? 

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On May 21, the Finance Minister announced that the government had decided to reduce the “excise duties” by Rs 8 per litre on petrol and Rs 6 per litre on diesel. The notification was apparently made available very late in the day. All channels on that day and all newspapers the next morning assumed — and reported —  that reductions had been made in the excise duties (which are shared with the states). It was wrong; the reductions had been made in the additional excise duties (which are not shared with the states).

On May 22, the Finance Minister tried to shame the states: ‘I have reduced duties, now you reduce VAT’. It was an attempt at one-upmanship. As the numbers tumbled out, it became clear that the Centre had no case to ask the states to reduce the VAT on petrol and diesel.

Numbers Don’t Lie

First, let’s analyse the ‘reduction’. The bonanza for the Centre accrues from the Additional Excise Duty (also known as Road & Infrastructure Cess or RIC), Special Additional Excise Duty (SAED) and Agriculture & Infrastructure Development Cess (AIDC) which are not shared with the states. In May 2014, all excise duties amounted to Rs 9.48 per litre on petrol and Rs 3.56 per litre on diesel. By May 21, 2022, the Centre had increased the duties to Rs 27. 90 per litre on petrol and Rs 21.80 per litre on diesel. That amounted to an increase of Rs 18+ per litre!

Next, let’s look at the shared basic excise duty and the not shared RIC which was reduced: (see table)

Of the shared tax revenues, the Centre keeps 59 per cent and all the States share the remaining 41 per cent according to the percentages determined by the Finance Commission. All the States together get a pittance from petroleum products: 57.4 paise per litre on petrol and 73.8 per litre on diesel! There is neither gain nor loss, of any significance, through Basic Excise Duty.

The real source of revenue is the not shared excise duties. Having raised it by Rs 18+ per litre of petrol and diesel, on May 21, 2022, the Finance Minister reduced it by Rs 8 and Rs 6 per litre, respectively! This is what I call Rob Peter More and Pay Peter Less! 

VAT is Main Revenue

It is obvious that the states get practically nothing from the revenues raised by the Centre from petrol and diesel. Their main source of revenue is VAT on petrol and diesel (the other source being taxes on liquor). It is noteworthy that the states’ own resources as a proportion of total revenues is dwindling. Exhorting the states to cut VAT on petrol and diesel is akin to asking the states to beggar themselves: they will go broke and be obliged to borrow more (with the permission of the Central government) or carry a begging bowl to the Centre for more grants-in-aid. The little financial independence the states’ have will evaporate. Yet, four states have made cuts in the VAT: Tamil Nadu, Kerala, Maharashtra and Rajasthan.

Need Total Review

Neutral observers have argued that the entire gamut of Centre-states’ fiscal powers and relations must be comprehensively reviewed. In particular, the working of Articles 246A, 269A and 279A relating to the GST laws must be reviewed. States must have more financial powers to raise own resources. It is a fact that states that are starved of resources do not devolve sufficient funds to the urban and rural local bodies and the result is the 73rd and 74th Amendments to the Constitution are lying in deep freeze. Neither funds nor functions nor functionaries are made available to the municipal and panchayat bodies.

The virtual monopoly of financial powers in the hands of the Central government has led to concentration of other powers in the Central government. The Centre has encroached on the legislative domain of the states (e.g.  the farm laws). The Centre has exceeded its taxing powers (e.g., IGST on ocean freight, as pointed out by the Supreme Court). The Centre has often exercised its executive powers to override the executive powers of the state governments (e.g., transfer and ‘posting’ of the Chief Secretary of West Bengal on the day of his retirement from service in order to punish the officer concerned and overawe the state). The Centre’s policies tend to impose uniformity throughout the country (e.g., NEET, NEP, CUET). There has been a serious erosion of federal principles. The danger is that, in due course, federalism will be junked and India will become a unitary state — a proposal that was unambiguously rejected by the Constituent Assembly. 

You decide, what do you want? One India with de-humanising oneness and uniformity across subservient states or a Federal India that is enriched by vibrant, co-operating and competing states?

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