The Centre has slammed the Mayawati government for laxity in lowering Value Added Tax (VAT) on petroleum products. The reaction followed the decision taken by the Central Empowered Group of Ministers (EGoM), who raised prices of diesel, kerosene and domestic Liquefied Petroleum Gas (LPG) recently, owing to rising international oil prices. Justifying the Centre's compulsion to raise fuel prices, the Union government suggested that the state government should reduce VAT on petroleum products instead.

Defending the fuel price hike, Union Coal Minister Sriprakash Jaiswal said the state government could easily afford a 2% reduction of VAT, in turn providing residents of the state much-needed relief from spiralling petroleum product prices. Jaiswal said: "A 2% roll back will not affect the state coffers in a big way. The public sector oil marketing companies are bleeding and the government should help them immediately."

In March 2011, with an eye on the forthcoming assembly elections scheduled in 2012, the UP government had announced a rebate in VAT on essential items and certain farm products, including motorised and non-motorised vehicles for physically challenged people (down to 4% from 12.5%), and on 10 horse power pump sets used by farmers, which was also reduced to 4% level.

However, the UP government had ruled out a reduction of VAT on diesel, claiming that the tax rate in UP was already lower than most other states. In a letter UP chief minister Mayawati dispatched to Prime Minister Manmohan Singh, she mentioned that UP had lowered VAT on diesel from 21% to 17.23%, while VAT on LPG was waived. Maintaining there was no headroom for VAT reduction, the state government had, instead, urged the Centre to rollback fuel price hikes. A senior UP government official, said: "The UPA government has taken a decision they know is hugely unpopular among the masses. Now, they are trying to place the blame for high prices on state governments. If the Centre alleges the state government is trying to fleece the local public, the government at the Centre is doing so at nationwide level.''

The political spat aside, the Petroleum and Natural Gas Regulatory Board (PNGRB) is also expected to approach the UP government for reduction of taxes levied by the state on natural gas. The regulatory board has repeatedly advocated rationalization of state levies on natural gas. Though the Union government offers tax exemption on CNG consumption, UP continues to charge 23.5% tax. In comparison, Gujarat and Maharashtra levy 15% tax on CNG, while Haryana imposes 5.25%.

The Central government officials claim consumption patterns will see a spike should the state government lower the tax regime. Currently, Uttar Pradesh consumes only 3.5 lakh scm gas per day, significantly lower than Delhi as well as Gujarat.