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Monday, December 6, 2021
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More relief: Fuel taxes on petrol and diesel cut by 22 states and Union Territories

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Taking cue from the Centre, which reduced taxes on petrol and diesel by Rs 5 per litre and Rs 10 per litre, respectively, effective Thursday, as many as 22 states and Union Territories have cut their sales tax/VAT rates on the two fuels. Though the state taxes are levied on an ad valorem basis as opposed to Centre’s specific imposts, the tax cuts by the states/UTs are up to Rs 8.7/litre for petrol and Rs 9.52/litre in the case of diesel.

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While state governments run by the BJP and its allies accorded the tax reliefs to consumers, Opposition-ruled states refused to toe the line, saying since it was the Centre which hiked the taxes steeply, it was incumbent on it to cut the taxes and not on the states. States have suffered significant erosion of their autonomous fiscal space due to various steps taken by the Centre in recent years including the steep hikes in assorted cesses, the proceeds from which are not required to be shares with the states, the Opposition-ruled states argue.

Of course, the cut in central taxes will automatically translate into reduction in state taxes because the latter are levied on the base, inclusive of the Centre’s taxes. Any rate cut by the states will lead to further reduction in the tax incidence.

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An official source told FE on condition of anonymity that the Centre’s revenue loss in November-March of the current fiscal year due to the fuel tax cut could be of the order of Rs 65,000 crore.

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Meanwhile, analysts at Nomura estimated that the Centre could lose Rs 45,000 crore (0.2% of GDP) in the remainder of FY22 due to the tax cuts on auto fuels. “In FY21, the government earned Rs 3.7 lakh crore (~1.9% of GDP) from excise duties: Rs 32.9/litre on petrol and Rs 31.8/litre on diesel. So far, in H1FY22, petrol consumption has risen by 21.4% y-o-y and diesel consumption by 15.4%, reflecting the sharp increase in activity,” they added.

Analysts at Barclays said the impact of lower taxes on petrol and diesel on the Centre’s FY23 revenues will be almost Rs 1.3 lakh crore (0.5% of GDP). “Overall, the direct impact of this price reduction will be 12bp on headline CPI in November, and it will lead to an indirect impact of a 12bp reduction in 3 months, bringing the total impact to 24bp, as per our estimates,” they added.

No estimate of the revenue losses for the states are immediately available.

India Ratings chief economist Devendra Kumar Pant estimated that the Centre would forgo some Rs 58,000 crore in excise duty collections owing to the latest move. “Since tax collections have been buoyant in FY22, this reduction is unlikely to alter FY22’s fiscal arithmetic,” Pant noted. His estimate is based on H1FY22 fuel consumption growth and assuming that the same growth pattern for November-March of FY22.

In H1FY22, the Centre’s gross excise duties receipts grew 33% on year to Rs 1.72 lakh crore against the Budget estimate of 14% decline on year to reach Rs 3.35 lakh crore target set for the full year. The Centre could still exceed its excise duty collections target for FY22.

Going by the past trends (except pandemic-hit FY21), H1 receipts were usually 40% of the full year receipts. So, the Centre could have collected Rs 4.3 lakh crore in FY22 if excise duties had remained unchanged. So, even after the cuts, excise duties receipts (86% of which from petrol and diesel) could still be Rs 3.7 lakh crore or 10% more than the FY22 BE.

PTI reports: “The additional reduction, on top of the excise duty cut, is the lowest in Uttarakhand because of lower duty cuts and the highest in UT of Ladakh. On petrol, the price reduction over-and-above excise reduction ranges from Rs 1.97 per litre in the case of Uttarakhand to Rs 8.70 in the case of UT of Ladakh. For diesel, the additional reduction warranted by VAT cuts, ranging from Rs 17.5 a litre in Uttarakhand to Rs 9.52 in the case of Ladakh.

The states and UTs that extended additional VAT benefits are Karnataka, Puducherry, Mizoram, Arunachal Pradesh, Manipur, Nagaland, Tripura, Assam, Sikkim, Bihar, Madhya Pradesh, Goa, Gujarat, Dadra & Nagar Haveli, Daman & Diu, Chandigarh, Haryana, Himachal Pradesh, Jammu & Kashmir, Uttarakhand, Uttar Pradesh and Ladakh. Karnataka saw Rs 8.62 a litre cut in petrol price due to VAT reduction and Rs 9.40 in diesel rates, while Madhya Pradesh gave its citizens an additional Rs 6.89 price relief on petrol and Rs 6.96 on diesel. Uttar Pradesh lowered VAT on petrol by Rs 6.96 and diesel by Rs 2.04 a litre.

States that have so far not lowered VAT include Congress and its allies ruled Rajasthan, Punjab, Chhattisgarh, Maharashtra, Jharkhand and Tamil Nadu. AAP-ruled Delhi, TMC-governed West Bengal, Left-ruled Kerala, BJD-governed Odisha, TRS-led Telengana and YSR Congress-ruled Andhra Pradesh.

Wednesday’s excise duty cut had translated into a reduction in the price of petrol in the range of Rs 5.7 to Rs 6.35 per litre across the country and diesel rates by Rs 11.16 to Rs 12.88.

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