Fuel on Fire: Indian states make a killing on taxes as citizens suffer

Only a handful of states reduced sales tax or VAT on petrol as retail fuel prices kept rising across India

Even as ordinary people feel the heat over rising fuel prices, an analysis of central and state finances by Business Standard shows that most Indian states are making a killing with fuel prices touching an all-time highs in India. The Modi government has lobbed the ball in the court of various states to control fuel prices by slashing their respective sales tax or value-added tax (VAT) on petrol and diesel.  While certain states have reasoned that any tinkering in this department would hurt their finances, a closer look at their accounts show that despite the windfall from fuel tax collections, their fiscal position has deteriorated over the years---and this, even though state fuel taxes are ad valorem and the revenues therefrom increase or decrease every time fuel prices rise or decline.    

Of the 22 large states with the highest fuel tax collections and the Union Territory (UT) of Delhi, at least 17 have seen their VAT collections from the sale of petroleum products rise by more than 30 per cent from 2015-16 to 2017-18. This was the period when the price of the Indian crude basket also started inching upwards after falling by more than half during 2014 and 2015. The price of the Indian basket of crude oil, which consists of three-fourths of sour grade Oman and Dubai and the rest the sweeter grade Brent, has risen by almost 57 per cent during the period when most Indian states made a killing. The retail prices of petrol and diesel, meanwhile, have risen by a third and 48 per cent respectively during the same period. The almost concomitant rise of retail fuel prices, along with the price of Indian crude, shows that Indian consumers haven’t been shielded from its impact by their state governments through reduction on taxes. (See Graphic: Increase In Fuel Tax Revenue of States 2015-2018)

Double whammy

In fact, a look at the fuel tax structures would show that some states have gone as far as increasing tax rates when fuel prices have increased and in the process have dealt a double blow to Indians. At least 13 of the 22 states have seen some form of increases in sales tax rates or VAT rates on petrol between June 2015 and September 2018. Only eight states reduced these taxes on petrol during this period while Haryana was the only state that did not tinker with the tax rates on petrol. At least five of these states saw double-digit increases in taxes on petrol. Particularly notorious were Maharashtra and Delhi, where the taxes on petrol rose by 11 percentage points and seven percentage points, respectively, during this period. Maharashtra has a dual-tax structure under which Mumbai, Navi Mumbai and Thane are taxed higher than rest of the state.

Other states that saw double-digit tax hikes on petrol during this period were Madhya Pradesh, Tamil Nadu and Assam. Surprisingly only a handful of non-BJP ruled states such as West Bengal, Telangana, Punjab and Andhra Pradesh reduced taxes on petrol during this time when fuel prices were rising due to global pressures and the weakening of the Indian rupee. The scenario was a bit different with diesel, which is electorally a more crucial commodity, considering its dominance in the transport sector and whose price rise also leads to a rise in prices of essential commodities from vegetables, milk and fast moving consumer goods. At least six of the 21 states increased VAT on diesel in double digits. Particularly opprobrious tax increases were seen in the Delhi, Haryana, Punjab and Assam. In Haryana, tax on diesel was hiked by more than five percentage points between June 2015 and September 2018. And any cut in tax rates has been spurred by political calculations more than citizen-focussed policy making. With elections due in a few months, Rajasthan has announced a four per cent cut in VAT. Andhra Pradesh and West Bengal too have announced fuel price cuts the past few days. 

No fiscal relief

The rise in fuel prices led to a windfall for all states during a period when Indian consumers were battling high fuel prices. In fact, certain states which had introduced moderate increases in tax rates saw astronomical jumps in their VAT collections from 2015 to 2018. Odisha’s collections more than doubled while Delhi, Uttar Pradesh and Rajasthan saw their fuel tax collections rise by almost a fourth. But if some states were hoping that the buoyancy in fuel tax revenues would help in narrowing their fiscal deficits, they were mistaken. Odisha’s fiscal deficit rose from 2.1 per cent to 3.5 per cent during this period. Maharashtra and Madhya Pradesh, two other states that had increased taxes, saw their fiscal deficit deteriorating during this period. Tamil Nadu, which failed to reduce taxes on sale of petrol, saw no improvement in its fiscal deficit, while Bihar which had marginally increased VAT on petrol on diesel saw its fiscal deficit more than double.

In fact, not just did the fiscal gamble of states go wrong, but a look at overall sales tax revenue of these states would show that most of them banked on rising petrol and diesel prices to drive their sales tax revenue growth. Contrarily, in some states like Uttar Pradesh, Assam and Uttarakhand, the amount of total sales tax or VAT revenue collections fell between 2015 and 2018, even as their fuel tax revenues grew exponentially. Of the 23 states and a UT, at least 14 states and Delhi saw either their fuel tax revenues growing almost at the same pace as their total sales tax collections or their fuel tax revenue growth exceeded their total sales tax revenue growth. This indicates that a majority of Indian states failed to shore up revenues from elsewhere and instead seized on an opportunity presented by rising fuel prices at a time when millions of Indians struggled with rising fuel costs. Among the most notorious states in this regard were Odisha and Uttar Pradesh, where fuel tax revenues of state governments grew by 127 per cent and 23 per cent, respectively. While Odisha's total sales tax collections during this period grew by just 21 per cent, Uttar Pradesh's total sales tax collections actually declined by 18 per cent. 

Clearly, for certain states that thought that they could turn around their financial fortunes by letting ordinary Indians bear the brunt of rising crude oil prices, the experiment seems to have failed miserably.