Taking cue from the Goa government which has slashed the Value Added Tax (VAT) on petrol, the Samajwadi Party government is also contemplating a similar decision from the new financial year (2012-13). The government may also reduce the VAT on some essential commodities, thereby giving more relief to the people.

The SP manifesto also promised abolition of VAT in Uttar Pradesh. In fact, the party had been critical of the tax policies under the Mayawati government. The SP had opposed the implementation of VAT during its previous regime under Mulayam Singh Yadav (2003 to 2007) despite specific deadline of March 31, 2007. It was only after Mayawati government came to power that VAT was finally implemented in UP.

The government has sought a brief from the finance department on the modalities of the proposal including the extent to which VAT could be reduced to directly benefit the common man. At present, UP has one of the highest VAT rates on petrol (26.55%) and diesel (17.23%) in the country. "It will take time. The issue has to be assessed in totality. Being a policy decision, it will have to be scrutinized for its viability before a decision is taken to table it before the cabinet," said a senior IAS officer privy to the government move.

The government, sources said, has agreed in principle to do away with a fraction of the revenue receipts to accommodate the tax reduction. It has also sought a report from experts to suggest sectors in which VAT could be adjusted, so that it does not have a direct burden on people.

Similar reduction in VAT has been suggested by the state governments in Goa, Madhya Pradesh and Andhra Pradesh. There are indications that the government may offer a relief between 4-7% on per litre price of petrol. This apart, taxes levied on some other essential goods may also see a fall.

Any reduction in VAT on petrol and diesel is sure to have a ripple effect on the prices of commodities which need transportation, including locally cultivated vegetables and fruits, which are transported to the wholesale markets from the farm fields.

The government has also planned to set up a task force to ensure that the benefit of the tax cut is carried down the line right up to the consumer. The task force will hold meetings with petrol and diesel dealer associations, transporter associations and wholesalers to ensure that the tax relief comes down to consumer level.

The reason for setting up a task force is to ensure that benefit of tax relief reaches people. It will look for the ways to minimise the intervention of middlemen and transporters who absorb the entire relief themselves without putting forward to the consumer - the target beneficiary of the government.

The state government move is based on some simple arithmetic based on petrol price hike by the UPA regime. When the fuel hike was announced in June 2009, the retail price of fuel in Lucknow was Rs 43.48.

Of this, Rs 20.74 went to the Central and state governments by way of taxes totaling around 47.71%, leaving the cost price of petrol at Rs 22.74.

After the last hike, the retail price of petrol in Lucknow had come to around Rs 71.32. Out of this, Rs 34.03 goes to the two governments as taxes. The state government believes that reducing its share of tax from petrol and diesel prices will, at worst, lead to revenue receipts from VAT at par with that of 2009 when the fuel hike was announced.