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States raise VAT on auto fuels to offset adverse impact on tax revenues
January, 12th 2015

Taking a cue from the Centre, which recently raised taxes on petrol and diesel to boost revenues, six state governments have, over the past few weeks, raised the value added tax (VAT) on these auto fuels. Others could soon follow suit. While the Centre hiked specific duties not linked to the price, the states are raising levies to offset an adverse impact to their tax revenues from the fall in prices of auto fuel prices since VAT is levied ad valorem.

Odisha, Madhya Pradesh, Goa, Rajasthan, Punjab and Haryana are among those that have recently upped the VAT on auto. Orissa raised VAT on both petrol and diesel by 3 percentage points to 23% on December 25 while Madhya Pradesh raised the tax rate by 4 percentage points on petrol to 31% and by an equal measure on diesel to 27%. Haryana raised VAT on diesel from 8.8% to 11.5% on November 25.

Trend-OilThe move marks the reversal of a trend among states, over the last four years, of cutting the VAT on petrol and diesel to reduce the impact of high global crude oil prices on inflation.

Crude oil prices stayed above $100 a barrel between 2011 and August 2014; between June last year and now, they have fallen by nearly 50% to levels of around $51 per barrel.

Since the tax increases by the Centre, and now the states, coincide with the reduction in fuel price announced by retailers IOC, HPCL and BPCL, consumers won’t get the entire benefit of the price fall while states could get away with higher revenue collections. Petrol prices have been reduced, gradually, by a total of Rs 12.27 per litre and diesel rates by Rs 8.46 a litre since last August in line with the fall in global crude oil price to around $50 a barrel last week from $115 a barrel in June.

The Centre’s move to raise excise duty on petrol by Rs 6 a litre and on diesel by Rs 4.5 a litre in three steps since November 12 last year is expected to help raise about Rs 17,000 crore as revenue this fiscal. For a full year, the duty increase could fetch the Centre about Rs 58,000 crore.

Had the Centre not raised taxes and oil marketing companies IOC, HPCL and BPCL retained the extra margin from the falling crude price, it would have reduced their under-recoveries and thereby the government’s subsidy outgo to them.

Goa, where petrol is the cheapest in the country because of the low tax rate, raised VAT on the fuel from 3.5% to 10% from January. While Punjab raised VAT on diesel by 1.5 percentage point to 11.25% with effect from November 15, Rajasthan raised tax on both petrol and diesel by 4 percentage point to 30% and 22%, respectively, from December 18.

 
 
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