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Taxes raised to bolster
March, 05th 2010

When responding to the question, one has to first understand that the price a consumer pays at the pump comprises (a) central and state taxes and levies that generate revenue for the respective governments, and (b) the price of the underlying petroleum product such as petrol and diesel.

The impact on the consumer and inflation is the same, no matter which component of the price is actually increased. A rise in the price of petroleum products has a cascading impact on inflation as the cost of industrial output and services rises and the same is passed on to the consumer.

The opposition is absolutely right in seeking a rollback given the inflationary impact the aam aadmi is already suffering. Hence, from this perspective, the opposition is not indulging in any political posturing.

What is being lost in the debate, however, is the fact that the government has raised taxes on petrol and diesel to bolster revenue that is needed for its social programmes.

In fact, the government has simply reinstated the tax reductions it had instituted in response to high global prices during November 2008 and September 2009.

What should be debated is whether there is a more equitable way for the government to raise the same level of resources equitable in the sense that the impact on the common man is less if not nil.

My own sense is that the current Budget is based on very optimistic revenue projections and it would not be prudent to give up any revenue source without cutting an equal amount from one or more programmes included in the Budget.

If a reduction in expenditure is not an option, the government should explore how it can raise the same amount of revenue through direct and indirect taxes from the top 2% of Indians who have the capacity to absorb the same. I also believe that the countrys petroleum sector needs tax rationalisation and not tax increases. The high incidence of taxes on the petroleum sector, relative to our GDP, is negatively impacting countrys growth.

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