States asked to shift to specific tax rates of petrol, diesel

States complain fuel price hike having spiraling impact on other commodities already facing steep price rise

Close on the heels of hike in diesel and petrol to contain the import bill, the centre has urged states to shift to specific rates of duties on fuel especially sales tax.
 
According to officials, the states were advised to to shift to specific rates at a meeting of the finance minister with all political parties before deciding on the current round of fuel price hike.

Representatives of various states complained about the spiraling impact of the fuel price hike on other commodities which are already facing steep price rise.
 

The finance minister suggested that the states could help redress the problem by shifting to specific rates of duties on the fuel instead of the current practice of advalorem rates.

The centre on the other hand follows specific rates of duties on the fuel which helps to contain some impact of price rise due to continuous phase of fuel price hike. This is however beneficial when the fuel price is going up.
 
Specific rates means the duties are fixed irrespective of the price of the fuel and they are currently Rs 1.40 per litre of diesel and Rs 9.20 per litre of petrol.

On the other hand, states follow advalorem rates which move as percentage of the prevailing prices.

The present system of ad valorem tax accentuates the effect of the shift in prices proportionately. When petroleum prices rise, the government gains by way of additional tax and imposes an additional burden on the consumer.

Similarly, when prices of petrol and diesel drop, the consumer benefits and the revenues of the government drop in proportion.

Since revenues from petrol and diesel account for around 20- 25% of the total revenues of the States, its importance to the fiscal stability of the State government is critical. In fact many states are mulling shifting to specific rates.

The Government of Kerala has on four consecutive occasions, since May 2011, rolled down the rate of taxes on these commodities, foregoing the additional revenue that would have accrued from the hike.

During end of August, the prices of petrol and diesel were hiked with further assurance of the petroleum ministry the prices may be hiked further. To specific, the price of diesel is expected to go up by RS 3-5 per litre of diesel and Rs 2 per litre of PDS kerosene.

According to the fuel ministry, in spite of eight increases in diesel price since January 18, totaling Rs 4.25/litre, the current loss to OMCs is Rs 12.12/litre. At present, the companies incur a monthly loss of Rs 6,204 crore on diesel sales.

At this rate, it will take some 20 months to eliminate this loss provided there is no further increase in international diesel prices or the rupee-dollar exchange rates, the minister elaborated. The monthly loss on PDS kerosene is Rs 2,398 crore, and LPG, Rs 3,058 crore.