Why are some states resisting a VAT cut on petrol and diesel

[Kool_SRG]

The Union government had changed the central excise duty structure on fuels in the past few years to keep most of the revenues with itself.

Pressure is mounting on states governed by the political rivals of the National Democratic Alliance (NDA) to reduce value-added taxes (VAT) on petrol and diesel after the Union government slashed excise duty on the two fuels by Rs 5 and Rs 10 a litre, respectively, on November 3. Most of these states including Maharashtra, West Bengal, Tamil Nadu, Kerala and Rajasthan had not lowered VAT rates till Sunday morning. But there are indications that some of them will do so shortly.

The NDA-governed states had cut VAT rates on transport fuels almost in a coordinated fashion soon after the Union finance ministry announced a reduction in additional excise duty or the road and infrastructure cess levied on petrol and diesel.

 

Notwithstanding the resolute resistance of some states to cut VAT rates, the share of that tax in the final price of the two fuels has declined in these states. This happened as the base – the sum of the price charged to dealers, the excise duty levied by the Union government and the dealer commission – on which the tax was calculated shrank. With a decline in excise duties, the amount subjected to VAT naturally fell. To illustrate, consider the impact of the tax changes in Delhi. The state government held steady the VAT rate on the two fuels, yet the tax declined by about Rs 1.30 a litre on petrol and by about 1.70 a litre on diesel.

There are risks associated with reducing tax rates – collections fall. A shrunken base and a lower VAT rate normally reduce collections in the states if there is no increase in consumption. For now, rising mobility across the country is expected to increase the demand for petrol and diesel.

 

States are as dependent on petroleum taxes as the Union government to raise resources for their expenditure and welfare plans. States levy VAT on sales within their borders. Revenues from VAT on petroleum products and other items accounted for about 20 percent of states’ own tax revenues normally. They are also entitled to a share in excise duty collected by the Union government, which is transferred to them through a devolution process, the formula for which is revised by the Finance Commission every five years.

However, states’ share of excise duties collected by the Centre has shrunk over the past few years as the Union government changed the structure of the levy to retain most of the collection. Therefore, states get only a tiny fraction of the excise taxes collected.

Of the Rs 32.90 collected as central excise and cess on every litre of petrol before the November 3 duty cut, states were entitled to a share in Rs 1.40 collected as basic excise duty. Similarly, of the Rs 31.80 collected on diesel, states were entitled to a share in the basic excise duty of Rs 1.80. After the cut of November 3, the Centre’s share of excise duties on petrol and diesel stands at Rs 27.90 and Rs 21.80, respectively.

The first big change in the structure of excise duties on petroleum products was announced by Arun Jaitley in the 2015-16 budget when he converted Rs 4 collected as excise duty on the two fuels into road cess. As a result, the amount of road cess or additional excise duty rose from Rs 2 to Rs 6 per litre of petrol and diesel, while the basic excise duty on petrol and diesel were reduced by Rs 3.50-3.70 a litre.

While it was not said in so many words, the changes to the excise duty structure came as a reaction to the decision of the 14^th Finance Commission, which had increased the share of states in the divisible pool of central taxes to 42 percent from 32 percent. With the Centre’s share of taxes collected reduced, it resorted to increasing cesses and surcharges – the Union government is not required to share collections from cesses and surcharges with states.

Before the rejig in the structure of excise duties, the Union government had increased basic excise duty in petrol and diesel by Rs 6.25 and Rs 5, respectively, in four instalments between November 2014 and January 2015, taking advantage of the fall in global crude oil prices.

After reducting basic excise duty on the two fuels in the Union Budget for 2015-16, the Centre increased it in five tranches between November 2015 and January 2016. This was followed by three cuts. That included a cut of Rs 2 in the Union Budget for 2018-19 for both fuels to allow for a similar increase in the additional excise duty, which was renamed as the road and infrastructure cess. The cess was raised to Rs 8 per litre of petrol and diesel that year.

With the economy slowing, the Union government revenues under pressure and crude prices softening, Finance Minister Nirmala Sitharaman announced a Re 1 increase in special additional excise duty and road and infrastructure cess in the Union budget for 2019-20. That increased the total excise duty and cesses on petrol to Rs 19.98 a litre and in diesel to Rs 21.83, but all the states together were only entitled to a share in the basic excise duty of Rs 2.98 and Rs 4.83 collected on petrol and diesel.

As the Covid-19 pandemic emerged, the road and infrastructure cess was increased by another rupee in March 2020 and by a whopping Rs 8 in May when the country was under a severe lockdown. The special additional duties were increased simultaneously. In the budget for the current fiscal year, yet another cess in form of excise duty – agriculture infrastructure and development cess – was imposed on petrol and diesel.

States have also increased their VAT rates on the two fuels during the pandemic, as they faced a fiscal crunch. Thus, the total incidence of VAT on the two fuels increased due to an increase in excise duties of the Centre and rate increase at the states. The BJP and its allies are demanding that state governments run by their rivals roll back the pandemic-induced VAT rates.

[Kool_SRG]

 

 

[Dabbakai]

petrol prices play a cruical role for BJP for the next term

[Ryzen_renoir]

36 minutes ago, Kool_SRG said:

The Union government had changed the central excise duty structure on fuels in the past few years to keep most of the revenues with itself.

Pressure is mounting on states governed by the political rivals of the National Democratic Alliance (NDA) to reduce value-added taxes (VAT) on petrol and diesel after the Union government slashed excise duty on the two fuels by Rs 5 and Rs 10 a litre, respectively, on November 3. Most of these states including Maharashtra, West Bengal, Tamil Nadu, Kerala and Rajasthan had not lowered VAT rates till Sunday morning. But there are indications that some of them will do so shortly.

The NDA-governed states had cut VAT rates on transport fuels almost in a coordinated fashion soon after the Union finance ministry announced a reduction in additional excise duty or the road and infrastructure cess levied on petrol and diesel.

 

Notwithstanding the resolute resistance of some states to cut VAT rates, the share of that tax in the final price of the two fuels has declined in these states. This happened as the base – the sum of the price charged to dealers, the excise duty levied by the Union government and the dealer commission – on which the tax was calculated shrank. With a decline in excise duties, the amount subjected to VAT naturally fell. To illustrate, consider the impact of the tax changes in Delhi. The state government held steady the VAT rate on the two fuels, yet the tax declined by about Rs 1.30 a litre on petrol and by about 1.70 a litre on diesel.

There are risks associated with reducing tax rates – collections fall. A shrunken base and a lower VAT rate normally reduce collections in the states if there is no increase in consumption. For now, rising mobility across the country is expected to increase the demand for petrol and diesel.

 

States are as dependent on petroleum taxes as the Union government to raise resources for their expenditure and welfare plans. States levy VAT on sales within their borders. Revenues from VAT on petroleum products and other items accounted for about 20 percent of states’ own tax revenues normally. They are also entitled to a share in excise duty collected by the Union government, which is transferred to them through a devolution process, the formula for which is revised by the Finance Commission every five years.

However, states’ share of excise duties collected by the Centre has shrunk over the past few years as the Union government changed the structure of the levy to retain most of the collection. Therefore, states get only a tiny fraction of the excise taxes collected.

Of the Rs 32.90 collected as central excise and cess on every litre of petrol before the November 3 duty cut, states were entitled to a share in Rs 1.40 collected as basic excise duty. Similarly, of the Rs 31.80 collected on diesel, states were entitled to a share in the basic excise duty of Rs 1.80. After the cut of November 3, the Centre’s share of excise duties on petrol and diesel stands at Rs 27.90 and Rs 21.80, respectively.

The first big change in the structure of excise duties on petroleum products was announced by Arun Jaitley in the 2015-16 budget when he converted Rs 4 collected as excise duty on the two fuels into road cess. As a result, the amount of road cess or additional excise duty rose from Rs 2 to Rs 6 per litre of petrol and diesel, while the basic excise duty on petrol and diesel were reduced by Rs 3.50-3.70 a litre.

While it was not said in so many words, the changes to the excise duty structure came as a reaction to the decision of the 14^th Finance Commission, which had increased the share of states in the divisible pool of central taxes to 42 percent from 32 percent. With the Centre’s share of taxes collected reduced, it resorted to increasing cesses and surcharges – the Union government is not required to share collections from cesses and surcharges with states.

Before the rejig in the structure of excise duties, the Union government had increased basic excise duty in petrol and diesel by Rs 6.25 and Rs 5, respectively, in four instalments between November 2014 and January 2015, taking advantage of the fall in global crude oil prices.

After reducting basic excise duty on the two fuels in the Union Budget for 2015-16, the Centre increased it in five tranches between November 2015 and January 2016. This was followed by three cuts. That included a cut of Rs 2 in the Union Budget for 2018-19 for both fuels to allow for a similar increase in the additional excise duty, which was renamed as the road and infrastructure cess. The cess was raised to Rs 8 per litre of petrol and diesel that year.

With the economy slowing, the Union government revenues under pressure and crude prices softening, Finance Minister Nirmala Sitharaman announced a Re 1 increase in special additional excise duty and road and infrastructure cess in the Union budget for 2019-20. That increased the total excise duty and cesses on petrol to Rs 19.98 a litre and in diesel to Rs 21.83, but all the states together were only entitled to a share in the basic excise duty of Rs 2.98 and Rs 4.83 collected on petrol and diesel.

As the Covid-19 pandemic emerged, the road and infrastructure cess was increased by another rupee in March 2020 and by a whopping Rs 8 in May when the country was under a severe lockdown. The special additional duties were increased simultaneously. In the budget for the current fiscal year, yet another cess in form of excise duty – agriculture infrastructure and development cess – was imposed on petrol and diesel.

States have also increased their VAT rates on the two fuels during the pandemic, as they faced a fiscal crunch. Thus, the total incidence of VAT on the two fuels increased due to an increase in excise duties of the Centre and rate increase at the states. The BJP and its allies are demanding that state governments run by their rivals roll back the pandemic-induced VAT rates.

Basic ga central govt fcked up their balance sheet by doing corporate tax cut and had to compensate it by raising their share of fuel taxes. 

State govts with little or no welfare schemes like all Bjp ruled states have no problem with cutting fuel taxes but states with welfare schemes cannot afford to do so.

Low fuel prices kavali antey elect  parties that will not promise too many welfare schemes

 

[Kool_SRG]

4 minutes ago, Ryzen_renoir said:

Basic ga central govt fcked up their balance sheet by doing corporate tax cut and had to compensate it by raising their share of fuel taxes. 

State govts with little or no welfare schemes like all Bjp ruled states have no problem with cutting fuel taxes but states with welfare schemes cannot afford to do so.

Low fuel prices kavali antey elect  parties that will not promise too many welfare schemes

 

BJP governed states also had do in compulsion some could be due to election mode and others as per orders by center..

Veellu iche GST compensation eh delay by 2-3 months these things are forcing to make states stand in front of center for help.

[Ryzen_renoir]

2 minutes ago, Kool_SRG said:

BJP governed states also had do in compulsion some could be due to election mode and others as per orders by center..

Veellu iche GST compensation eh delay by 2-3 months these things are forcing to make states stand in front of center for help.

True the powerful bjp brass made them do it but it's true that most bjp ruled states have negligible welfare schemes. 

Look at how the rich state of Karnataka has only 400 rupees  of old age pension while a bikari state of AP is paying 2500 and opposition is demanding to immediately increase it to 3000  

Ka pays only 250 crores/month towards social pensions while AP is paying 1500 crores per month

Even the salaries/pensions of AP state govt employees is almost same as Karnataka state govt at around 65kcr /yr while being smaller and earning significantly less revenue 

There's no free ride anywhere , if people are in support of welfare and high govt employees salary/recruitment then they must pay higher taxes 

[Dabbakai]

15 minutes ago, Ryzen_renoir said:

True the powerful bjp brass made them do it but it's true that most bjp ruled states have negligible welfare schemes. 

Look at how the rich state of Karnataka has only 400 rupees  of old age pension while a bikari state of AP is paying 2500 and opposition is demanding to immediately increase it to 3000  

Ka pays only 250 crores/month towards social pensions while AP is paying 1500 crores per month

Even the salaries/pensions of AP state govt employees is almost same as Karnataka state govt at around 65kcr /yr while being smaller and earning significantly less revenue 

There's no free ride anywhere , if people are in support of welfare and high govt employees salary/recruitment then they must pay higher taxes 

adi janalaki ardam kavali kada, eventually if you are getting free money you are paying for it. 2500 oste indirectly you might be paying 3000 to govt indirectly 

[Ryzen_renoir]

2 minutes ago, Dabbakai said:

adi janalaki ardam kavali kada, eventually if you are getting free money you are paying for it. 2500 oste indirectly you might be paying 3000 to govt indirectly 

You overestimate state govts ability to extract taxes 

The people getting 2500 are paying almost nothing back, it's just free ride on govts balance sheet. 

Sad part is opposition is demanding even more  schemes / freebies/ salaries 

A state stuck between two competitive welfare promises is bound for failure unless one of them is wiped out and a more responsible party takes its place 

[Battu123]