Faced with the task of effecting a fuel price hike in view of the hardening of crude oil prices in the international market, Petroleum and Natural Gas Minister Murli Deora has written to the Chief Ministers to reduce and rationalise sales tax and value added tax (VAT) on petrol and diesel.

Mr. Deora pointed out that the rise in international oil prices exerted an upward pressure on the domestic prices of petroleum products.

The ad valorem rates of VAT imposed by the State governments further aggravate the impact of international oil prices on the consumer, he added.

Underscoring the commitment of the UPA government to ensure the supply of fuel to the common man at affordable rates, Mr. Deora said that to achieve this objective, the Centre had provided financial assistance of nearly Rs.30,000 crore to the oil marketing companies towards under-recoveries during 2009-10.

Mr. Deora pointed out that the VAT rates were very high in most States and needed to be reduced. In some States, the VAT on petrol and diesel were as high as 33 per cent and 24.7 per cent respectively.

Further, in the current taxation structure, VAT is levied by the State governments on an ad valorem basis, meaning that when the oil prices are high, the tax on the products is higher, rendering the product even more expensive.

To address this issue, the ad valorem component of the VAT could be converted into a specific component, at the current levels, Mr. Deora said. The Centre has already done away with the ad valorem component of excise duty on petrol and diesel and the excise duty has been made specific. It is desirable that the State governments undertake similar tax rationalisation on petrol and diesel [prices]. Seeking early action on the issue, Mr. Deora asked the Chief Ministers to review the subject at the earliest so that the tax reform could be implemented.