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Can UP govt forgo its VAT earnings?
September, 15th 2012

The sharp rise in diesel prices have once again fuelled the debate that whether the Uttar Pradesh government can lower its own taxes to lessen the burden of inflation, which is hitting the common man, especially the farmers, who form the back bone of state's economy.

UP government levies 17.53% of Value Added Tax on every litre of diesel sold. This way, if it waives off the tax completely, the price of diesel will come down almost by Rs 7, much to the relief of people, who are already feeling the pinch of high inflation. The sale of diesel in Uttar Pradesh is almost 45 crore litre per month. Prior to the price hike, the government was getting Rs 5 as VAT per litre of diesel. So, mathematically, the state government was earning nearly Rs 2,700 crore every year as VAT from diesel.

This is third time since July this year, when the prices of diesel have been upwardly revised. It was Rs 43.12 per litre on July 1, when it was revised to Rs 43.95 on July 25. On August 1, the price of diesel was revised to Rs 44.05 per litre. The steepest rise came on Thursday midnight (September 14) when the price of the fuel shot up to Rs 49.05.

Petrol dealers argue that even if the taxes are lowered or at least brought at par with what is being levied by neighbouring states like Delhi where VAT is 12.5%, it would lower the pressure significantly. "We have been demanding this repeatedly. It is high time that the state government now start thinking on these lines," said BN Shukla, president of UP Petrol Pumps Dealers Association.

Economists, however, have divergent views on this. "It is not only the duty of the Centre, but also the state government to see that its subjects are not strained, because of the hike in fuel prices. Perhaps that is the only way to control the sharp rise in inflation," said Prof Yashvir Tyagi, of the department of economics at Lucknow University. "The state government should rather explore some other sources of taxes or at least strengthen its tax collection machinery," he added.

"This rise is certainly going to hit not only the middle urban class, but would also dent the morale of farmers, who are heavily dependent on diesel to power their tube wells," Prof Tyagi said, and added, "The government should look at other avenues to augment its own production of fuel, as it is the only way left to support the spiralling demand for fuel."

However, a section of economists, believe that the state government should not take the burden of other government constituents, the Centre in this case. "The state government has its own expenditure, which stands devalued because of the inflation. Now if it lessens its taxes, how would it match that expenditure," asked economist, Arvind Mohan. "It is the responsibility of the Centre to see that no such step is taken at this point of time. This rise was absolutely uncalled for. The entire fault lies in the timing of the decision," he said. Mohan further says that the Centre's decision comes at a time, when it provided subsidy to the corporate sector to the tune of nearly Rs 4,70,000 crore. "While the powerful corporate lobby gets benefited, it is the common man, who does not have a say in the government affairs, is being targeted," he said.

Economists believe that this rise in fuel prices may only be temporary, lasting for only six to eight months, as there will be a global slowdown and then prices would come down once again.

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