States vs Centre on fuel taxes

The Centre and the states are at loggerheads over taxes and duties on petrol and diesel.

What is the argument of the Centre?

  • Centre feels that some states are not reducing Value added tax (VAT) on petrol and diesel in line with the Centre’s cut in excise duty.
  • Recently, Prime Minister Narendra Modi said Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, and Jharkhand have not reduced Value added tax (VAT) on petrol and diesel.

What is the response of states?

  • States expressed concerns over their fiscal position, especially with the Goods and Services Tax (GST) compensation regime due to end in June.
  • Telangana CM said the state had not hiked fuel prices since 2014.
  • Kerala Finance Minister said the rise in fuel prices is due to the cess and surcharge levied by the Centre.

How much excise duty was reduced by the centre?

In November 2021, the Centre, for the first time in over three years, cut central excise duties on petrol (by Rs 5 per litre) and diesel (by Rs 10 per litre).

Did states reduce VAT?

  • While some States followed in the Centre’s footsteps with a cut in value-added tax (VAT), many others did not.
  • Around 21 states and some Union Territories cut VAT in the range of Rs 1.80-10 per litre for petrol and Rs 2-7 per litre for diesel.

What is the impact of the reduction of VAT on the state’s finances?

As per the RBI’s State Finances report for 2021-22, the revenue loss to states due to this is estimated at 0.08% of GDP.

What are the components of the retail price of petrol and diesel?

As Retail price of petrol and diesel are made up of mainly 3 components:

  • Base price (reflecting the cost of international oil)
  • Central excise duty
  • State tax.

Excise duty is constant all over India, whereas state taxes (sales tax and value-added tax (VAT)) vary from state to state.

How much excise duty is levied by the Centre?

As of February 2022, the Central excise duty on petrol had four components:

  1. ₹1.40 per litre was charged as basic excise duty (BED).
  2. ₹11 per litre was charged as special additional excise duty.
  3. ₹2.5 per litre was labelled as agriculture infrastructure and development cess (AIDC).
  4. ₹13 per litre was collected for road and infrastructure cess.

Thus, the Central component amounted to ₹27.9 per litre of petrol.

What is the contribution of fuel taxes to the government exchequer?

  • As per the Petroleum Planning & Analysis Cell, the sector’s contribution to the Union government exchequer stood at Rs 4.55 lakh crore in 2020-21, up from Rs 1.72 lakh crore in 2014-15.
  • In the case of states, it rose from Rs 1.6 lakh crore to Rs 2.17 lakh crore over the same period.

Why is the spillover effect of the rise in fuel prices?

The rise in fuel prices contributes to inflation. Since fuel is used for the transportation of most goods across the country, the sharp rise in fuel prices will creep into the costs of other commodities. Recently, Prices of fruits, vegetables, and even packaged items like milk, coffee powder and instant noodles have increased.

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