States are in no hurry to reduce VAT on petrol and diesel

Although the Center has reduced excise duty on petrol and diesel for the second time in seven months, opposition-ruled states do not seem to be in a hurry to be forced to cut value-added tax (VAT) to provide more relief to consumers.

The BJP-ruled states, which reduced their taxes after the Center cut taxes last November, are trying to reduce VAT by states where governments are led by opposition parties. These states did not reduce tax rates then.

On their part, the states ruled by the opposition say that since the central excise cuts have automatically reduced their taxes since their ad valorem tax was levied on a basis that includes central taxes, they have already effectively reduced their taxes. A further reduction in the tax rate would hit revenue hard, they noted.

Any reduction in rates by the states would further reduce the incidence of taxes Thus, Kerala will lose Rs 2.41 / liter on petrol and Rs 1.36 / liter on diesel while Rajasthan will lose Rs 2.48 / liter on petrol and Rs 1.16 / liter on diesel due to Saturday’s excise cut. As the rate of VAT varies from state to state, the effect of deduction of central excise duty on VAT will also change.

“Last time, all the BJP-ruled states reduced VAT rates and further reduced prices. At this point, other party-ruled states should think about it, “said Goa Chief Minister Promod Sawant.

Since 2014, when they have increased the central tax on petrol by ~ 23 / liter (+ 250%) and diesel by Rs 29 / liter (+ 900%), the central government has not said, wanting to know the point of view of any state. Now, with their growth back 50%, they are urging states to cut Is it federalism ?, “Tamil Nadu Finance Minister P Thiaga Rajan posted on Twitter in response to a tweet from the finance minister urging states to reduce VAT after the Center reduced excise duty on Saturday.

The Center on Saturday announced multiple measures to curb fugitive inflation, which is threatening growth and leading to a sharp fall in the rupee, as well as burdening consumers. It has reduced excise duty on petrol by Rs 8 / liter to Rs 19.1 / liter and on diesel from Rs 6 / liter to Rs 15.8 / liter to provide relief to consumers, a move which will cost the central exchequer Rs 1 trillion annually.

“The reduction in excise duty has been done entirely in the Road and Infrastructure Cess (RIC). Even in November 2021, the reduction of Rs 5 / liter on petrol and Rs 10 / liter on diesel was made entirely in RIC. Therefore, the full burden of these two tariff cuts (made November, 21 and yesterday) is borne by the Center (since it is not shared with the Cess States), ”Sitharaman tweeted on Sunday.

Although the criticism of the states is understandable, they have benefited from the increase in excise duty in the past. However, the gap between central excise and state VAT has narrowed considerably in the last seven months (see chart).

“Prime Minister Modi has increased taxes on petrol and diesel by Rs 26.77 and Rs 31.47 in 12 installments, respectively. He has reduced Rs 14.5 and Rs 21 so far. Refund the remaining additional tax of Rs 12.77 for petrol and Rs 10.47 for diesel before promoting high moral standards in the states, “tweeted former Kerala Finance Minister Thomas Isaac.

Taking hints from the Center, which reduced taxes on petrol and diesel to Rs 5 / liter and Rs 10 / liter, respectively, effective November 5, 2021, 22 states and Union Territories have reduced their sales tax / VAT rates on two fuels. Although the state taxes were levied on an ad value rate against the central pressure, the tax cuts in the states / UTs were up to Rs 8.7 / liter for petrol and Rs 9.52 / liter for diesel.

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