Petroleum Minister Murli Deora clearly indicated a rise in prices of petrol and diesel on Monday when he told state governments to reduce and rationalise sales tax/VAT (value added tax) of the two auto fuels.

In his letter, Deora asked the chief ministers to have the issue reviewed at their level so that the much-needed tax reform (of freeing fuel prices) can be implemented. If so, it would result in a price hike of petrol and diesel by up to Rs 3 per litre.

He said a rise in the international oil prices exerts an upward pressure on domestic prices of petroleum products. Ad valorem rates of VAT imposed by the state governments further aggravates the impact of international oil prices on the consumer, Deora added.

The Empowered Group of Ministers (EGoM) under Finance Minister Pranab Mukherjee is expected to meet sometime this week to consider freeing of petrol and diesel prices.

Enclosing a statement of VAT rates in different states, Deora pointed out that they are very high in most and need to be reduced. In few states, he said, the VAT on petrol and diesel is as high as 33 per cent and 24.7 per cent respectively.

In the current taxation structure, said Deora, VAT is levied by the states on an ad valorem basis, i.e. as a percentage of the price of the product. This means that when oil prices are high, taxation on the products is higher, rendering it even more expensive.

To address this issue, the ad valorem component of the VAT can be converted into a specific component, at the current levels, he said.