The Union Petroleum Minister, Mr Murli Deora, has called upon the State Governments to reduce and rationalise sales tax/VAT on auto fuels petrol and diesel.

In a letter to the Chief Ministers, he said that the VAT rates are very high in most of the States, and need to be reduced. In some States, the VAT on petrol and diesel is as high as 33 per cent and 24.7 per cent, respectively.

The Minister said, in the current taxation structure, VAT is levied by the State Governments on an ad valorem basis as a percentage of the price of the product. This means that when oil prices are high, the taxation on the products is higher, rendering the product even more expensive.

At a time of rising prices, ad valorem taxes have a cascading impact on the retail price of petroleum products. To address this issue, the ad valorem component of the VAT can be converted into a specific component, at the current levels, he said.

A rise in the international oil prices exerts an upward pressure on domestic prices of petroleum products, he said, adding that Ad valorem rate of VAT imposed by the State Governments further aggravates the impact of international oil prices on the consumer.

The Minister informed that the Central Government 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 also undertake similar tax rationalisation on petrol and diesel.

Also, some of the States are levying high VAT rates on a product such as PDS kerosene, which needs to be looked into in view of its usage in lighting and cooking purposes by the common man, he emphasised

Early action

Urging an early action on the part of State Governments, Mr Deora asked the Chief Ministers to have this subject reviewed at an early date so that the much-needed tax reform can be implemented. Levying specific VAT rates instead of ad valorem rates will help cushion the effect of rise in international oil prices.

While I appreciate your need for revenue mobilisation, the current high levels of local taxes on petroleum products are clearly unsustainable, if we are to protect the interests of the consumers, particularly the vulnerable sections of society, the Minister stressed.

Affordable rates

The Minister underscored the commitment of the Central Government to ensuring supply of essential fuels to the common man at affordable rates, an official statement said.

To achieve this objective, the Central Government has provided financial assistance of Rs 26,000 crore to the public sector oil marketing companies (OMCs), while the upstream oil PSUs have contributed Rs 14,430 crore towards under-recoveries of OMCs during 2009-10, he said.