States to lose Rs 7,000 cr on duty cut

However, the losses are likely to be offset to some extent by the increase in the retail prices of fuel, even after taking into account the impact of duty cuts on retail pricing mechanism.

The Centre has projected a revenue loss of Rs 22,660 crore in 2008-09 due to the abolition of Customs duty on crude, cut in Customs duty on petrol, diesel and other petroleum products, and cut in excise duty on petrol and diesel. With states' share from central taxes at 30.5 per cent, the loss works out to Rs 7,000 crore. States levy 20-32 per cent tax on petrol and 9-26 per cent tax on diesel.

Despite the duty cuts by the Centre, state governments will gain due to the increase in the retail prices of petrol and diesel by Rs 5 and Rs 3, respectively, and Rs 50 per cooking gas cylinder. "The states can reduce their sales tax to the extent they are gaining from a higher base effect. The sales tax cut to reduce the impact of fuel price increase on consumers will also give a political mileage to the ruling parties in the states going for elections," said a senior state government official.

While the sales tax rate cut by states like Delhi will be marginal, it could be substantial for other states that have high sales tax rates. Delhi has a 12.5 per cent tax on diesel and 20 per cent on petrol for now. Given that Assembly elections are scheduled towards the year end, the state government has already announced a Rs 40 discount per cooking gas cylinder.

After the central government announced the duty cuts yesterday to bail out oil marketing companies, West Bengal was the first to announce sales tax cut on petrol to 20 per cent from 25 per cent and to 12.5 per cent from 17 per cent on diesel. The state will lose Rs 500 crore annually because of sales tax cut.

Petroleum products contributed about Rs 60,000 crore to the states' revenue, out of which share from the central government revenue from the oil sector was around Rs 23,900 crore in 2007-08. Besides tax cuts on petroleum products, the state finance ministers' meeting in the last week of June, will discuss the possibility of a sales tax cut on aviation turbine fuel to give some relief to air travellers after the recent increase in its prices.