Fuel to GST: Centre-state relations may emerge as a rallying point for Oppn

Oil prices, resource sharing, and underlying issues of federalism are quickly emerging as an area of rising political contention in Centre-state relations.

This is not the first time opposition parties have come together on the issue of inequity between the Centre and the states. The last time around, in the 1980s, N T Rama Rao joined hands with such powerful provincial leaders as Jyoti Basu in West Bengal, H N Bahuguna in Uttar Pradesh, Sharad Pawar in Maharashtra, Farooq Abdullah in Jammu & Kashmir, and Devi Lal in Haryana to demand more powers — fiscal and administrative — for the states and non-interference by the Centre in areas that were constitutional responsibilities of the state governments. This proved a landmark event in Indian politics.

On April 27, Prime Minister Narendra Modi opened another front by naming seven opposition-ruled states that did not cut their value-added tax (VAT) and sales tax on petrol and diesel to the detriment of the people. He said states like Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, and Jharkhand did not reduce VAT last November, when the Centre cut excise duties on petrol and diesel.

“Some states reduced taxes but some others did not give any benefit of this to the people. Due to this, the prices of petrol and diesel in these states continue to remain high. In a way, this is not only injustice to the people of these states but it also has an impact on neighbouring states,” he said.

Reactions from opposition states were swift as they saw this as an infringement of one of the last major sources of revenue that the states have left. After all, goods and services tax has limited the states’ powers to tax just petroleum products and liquor, apart from the ad valorem tax on the value of a property.

Opposition chief ministers have made it clear that they would reduce tax rates on petrol and diesel if the Centre cleared their dues. West Bengal Chief Minister Mamata Banerjee charged Modi with shifting responsibility to states, while her Maharashtra counterpart, Uddhav Thackeray, said the Centre owed his state around Rs 26,500 crore.

In the general public perception, fixing the prices of petrol and diesel is seen as the responsibility of the Centre, even though they were decontrolled in 2014. It is this narrative that was sought to be changed. “The idea was to put across to the public that states are also responsible for imposing taxes on retail fuel products,” a central government official said.

What Centre and states earn from fuel taxes

Central and state-level taxes contribute about 55 per cent of the retail price of petrol and 51 per cent for diesel. Apart from the taxes, fuel prices include freight charges and the dealer commission. The data from the government’s Petroleum Planning and Analysis Cell (PPAC) shows the contribution to the exchequer of the states in the form of sales tax and VAT on petroleum, oil, and lubricants has increased by 46 per cent from 2014-15 to 2019-20.

In April-December 2021-22 (the January-March data for the fiscal year not yet available), the proceeds from various taxes and duties on petroleum products for the Centre were Rs 3.54 trillion against Rs 4.6 trillion in 2020-21 and Rs 3.34 trillion in 2019-20.

For the states, the proceeds from taxes and duties on petroleum products were Rs 2.08 trillion in April-December 2021-22 against Rs 2.18 trillion in 2020-21 and Rs 2.21 trillion in 2019-20.

Hence in 2020-21 year-on-year, the Centre’s revenues from fuel taxes increased substantially, while those of states reduced marginally.

The cracks in GST Council

To be fair, if one leaves aside the politics of the day, friction between the Centre and the states is always down to sharing resources and currently nowhere is it starker than on the issue of GST compensation.

As Business Standard’s A K Bhattacharya wrote on April 27, to secure the support of all the states for launching GST, then Union finance minister Arun Jaitley had assured them an annual revenue growth rate of 14 per cent from the tax, anything below which would entitle them to compensation from the Centre for the first five years after its roll-out.

That compensation ends in June 2022. However, the pandemic and the resultant hit on economic activities have led to a huge shortfall in the compensation cess. In 2020-21 and 2021-22, the Centre borrowed Rs 2.69 trillion in total and transferred it to the states.

At the Lucknow meeting of the GST Council in September 2021, Union Finance Minister Nirmala Sitharaman agreed to extend the compensation cess till March 2026, but only to enable paying back the principal and the interest on the Rs 2.69 trillion borrowed, and not to give to the states. Among the states, there is consternation on the issue.

This is also one of the reasons why the states want to hold on to the power of taxing petroleum products and not bring it within the purview of the GST Council.

What is largely an issue of resource-sharing is being turned into a movement to protect the states’ rights from encroachment by the Centre. Tamil Nadu, run by the opposition DMK, is leading an agitation to curb the rights of the governor, as is Maharashtra. On the other hand, BJP-ruled states are springing up to align their administrative and political policies with the Centre — BJP-ruled Uttarakhand and Himachal Pradesh announced recently they would support a common civil code, though in both states, the percentage of the minorities is small. Centre-state relations could emerge as a rallying point for the opposition in the coming days.