States benefit as local taxes add fuel to petrol price fire

When finance minister Pranab Mukherjee took a dig at states last week for pocketing a major chunk of the tax pie on petroleum products, he had a point. State governments are laughing all the way to the bank as their revenues on petrol have risen 40-43 per cent, thanks to their taxation policies.

Take the case of Delhi. The Congress-ruled administration was earning Rs 7.99 on every litre of petrol when it was selling at Rs 47.93, prior to the price decontrol in June 2010. At Tuesday’s petrol price of Rs 68.64 in the capital, the government is earning Rs 11.14, a 39.42 per cent increase.

On a monthly sale of around 113 million litres, the state was then earning Rs 90.28 crore. For the same quantity, it now earns Rs 125.88 crore. On an annual basis, this translates into an extra earning of Rs 427 crore. The situation, however, is not unique to Delhi, which levies 20 per cent VAT on petrol. All state governments levy VAT on petrol, ranging from 15 per cent (in Puducherry) to 33 per cent (in Andhra Pradesh). The Maharashtra government’s earnings on monthly sales of around 150 million litres have increased from Rs 170 crore to Rs 220 crore.
 

VAT’S THE DIFFERENCE
City	Price on June 1, 2010	Component   of VAT+ surcharge	Price on Nov 8, 2011	Component  of VAT+ surcharge
New Delhi	47.93	7.99	68.64	11.14
Mumbai	52.20	11.33	73.81	14.71
Chennai	52.13	11.77	72.73	15.14
Kolkata	51.67	10.91	73.15	14.12
Figures in Rs/litre                                                            Source: Oil companies

Since its deregulation in June 2010, the price of petrol has gone up around 43 per cent. Under the current taxation structure, VAT is levied by state governments on an ad-valorem (percentage) basis. This means when prices are high, taxation is higher, too. That renders the product more expensive. Naturally, the state government kitty also swells by that amount.

By contrast, the excise duty imposed by the union government is specific at Rs 14.35 a litre, exclusive of a three per cent cess. Moreover, in June this year, the union government removed the five per cent customs duty on crude oil, brought down the import duty on petrol and diesel from 7.5 per cent to 2.5 per cent and reduced the excise duty on diesel by Rs 2.60 to Rs 2 a litre. The combined impact of these changes is estimated at Rs 49,000 crore per annum. The centre has been urging states to rationalise taxes but no state has acted. “At a time of rising prices, ad-valorem taxes have a cascading effect on the retail price of petrol. The state governments should convert the ad-valorem component of VAT into a specific one to provide relief to consumers,” said an Indian Oil executive.