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Falling revenue fuels VAT war between Andhra Pradesh and Telangana
April, 24th 2015

After the tussle over interstate vehicle tax, Andhra Pradesh and Telangana are set to lock horns over tax rates on petrol and diesel.

Losing out significant revenue to Telangana where fuel prices are cheaper, Andhra Pradesh is mulling a marginal reduction in Value Added Tax (VAT), by 4 per cent, on both petrol and diesel.

AP information minister Palle Raghunath Reddy said that the issue is likely to be taken up in the next cabinet meeting. "Tax rates on petrol and diesel were supposed be discussed in the cabinet meeting today. But it is likely to be deliberated in the next meeting," said Raghunath Reddy told TOI on Wednesday.

"The tax rates need to be competitive to ensure revenue growth. We are looking into all aspects including the sales tax rates on petrol and diesel," an official in the finance department said, adding that finance minister Y Ramakrishnudu would discuss the issue with officials in a review meeting on Friday.

Not to be left behind, Telangana has decided to follow suit. Sources in the commercial tax department said the tax rates on fuel in the state would be reduced if AP does so. "Our tax policy is not dependent on the rates of a neighbouring state, but we need to watch them in order to prevent trade diversion in border areas. We will take stock of the tax rates of all the neighbouring states and decide on a course correction if needed," Telangana commercial tax minister Talasani Srinivas Yadav told TOI.

Interestingly, both Telangana and AP had hiked VAT a few months ago. With the state losing revenue of Rs 20 crore a month due to the falling base prices of petrol and diesel, the Telangana government in January had hiked VAT at the rate of Rs 2 per liter (both petrol and diesel) in a bid to make up for the losses. Andhra Pradesh went a step ahead and hiked VAT by Rs 4 per liter in the hope that the step would fetch an additional revenue of Rs186 crore a year. But the hike had an opposite effect to what the two governments had hoped for, as both the states saw fall in revenue from automotive fuel sales.

Revenue records at the end of March showed both T and AP losing revenue. While over five lakh litres of diesel was sold in both the states, there was a dent of Rs 20 crore in AP's kitty and Telangana has lost Rs 10 crore.

Experts attribute this to trade diversion to the neighbouring states of Karnataka, Maharashtra and Tamil Nadu where fuel rates are cheaper. "Consumers close to the borders are bound to cross over to the next state to fill up their vehicles. With the borders of Telangana and AP becoming smaller after the bifurcation, the trade diversion does not come as a surprise," said Bhusahan Narang, an office bearer of All India Petrol Dealers' Association.

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