States demand more cuts on fuel tax, say slashing VAT will drain revenue

The Centre deduction of excise duty on petrol and diesel has received mixed responses from states with critics unanimously demanding a further drop in taxes.

While many states where the BJP, Congress and regional parties are in power have lauded the Centre’s decision and effected cuts in Value-added Tax (VAT) on petrol and diesel, several other states have criticised the tax cuts – by ₹8 per litre of petrol and by ₹6 per litre of diesel – while also calling the Centre’s “exhortation” to states to reduce VAT “unfair”.

‘Three steps forward, two steps back’

The Congress which expressed displeasure over the Centre’s cut in fuel prices has called it “three steps forward and two steps back.”

“The prices are back to the March 2022 numbers. Were the common people pleased at the fuel prices in March 2022? The answer is No. Is the government still charging a hefty excise on fuel? The answer is yes. True relief will only come when the excise will be reduced to 2014 levels,” party spokesperson Gaurav Vallabh said.

Veteran Congress and former finance minister P Chidambaram on Sunday wondered if states can afford giving up revenue from VAT on petrol and diesel unless the Centre devolves more fund or provides them more grants.

Reluctant and non-committal

States like Bihar and BJP-ruled Karnataka have remained non-committal about slashing VAT on fuel prices. Even though Maharashtra has slashed VAT on petrol and diesel by ₹2.08 and ₹1.44 per litre respectively, it anticipates the state exchequer to lose revenue of ₹80 crore on petrol and ₹125 crore on diesel a month due to the tax cuts, and a total annual revenue loss of ₹2,500 crore.

Also read: To offset fuel excise duty cut, Centre may borrow ₹1 lakh crore: Report

Maharashtra Chief Minister Uddhav Thackeray on Saturday had lashed out at the Centre for hiking petrol and diesel prices to exorbitant levels and then effecting nominal cuts.

Karnataka Chief Minister Basavraj Bommai has said that his government would study the feasibility of tax cuts at the state level. Last month, he dragged feet on reducing VAT, stating that a decision in this regard would be taken after taking the economy of the state into account.

Bihar Chief Minister Nitish Kumar, whose JD(U) is running the government with BJP as an ally, welcomed the Centre’s cut in excise duty in fuel prices, but has not promised a tax cut from the state’s end, stating that the matter is under discussion.

States demand more tax cuts from Centre’s end

Telangana’s finance minister T Harish Rao who called the Centre’s slashing of taxes “bogus” and “humbug” echoed the sentiments of his Tamil Nadu counterpart PTR Palanivel Thiagarajan in demanding more tax cuts from the central government’s share.

Thiagarajan on Sunday had criticised the government for not taking state governments into confidence while deciding to cut down on taxes, while stating that the expectation from states to further reduce tax was “unfair” and “unreasonable”.

Rajasthan Chief Minister Ashok Gehlot, whose government had slashed VAT on petrol and diesel by ₹2.48 and ₹1.16 per litre respectively, criticised the ‘sudden increase’ in petrol price by 71 paise per litre on Sunday and said such hikes would render the cut in excise duty “irrelevant”.

Gehlot joined the Telangana finance minister in demanding the Centre to slash the excise duty on petrol and diesel to the level of the UPA government, so that a litre of petrol or diesel doesn’t exceed ₹70.

Both Gehlot and Rao said that the Centre’s tax cut would cause states to lose revenue as it would have a cascading effect on their respective taxes.

“The recent reduction will cause a further loss of around ₹800 crore in annual revenue to the state. This will put a huge strain on the finances of the states that were already burdened due to the additional expenditure incurred by them for COVID relief activities,” Thiaga Rajan said.

Thiaga Rajan said the Centre’s tax hike on petrol in the past seven years has filled its coffers, but not that of states as the former has “increased the cess and surcharge on petrol and diesel while reducing basic excise duty that is shareable with the states.”

He said the latest taxes on petrol (₹19.90 a litre) and diesel (₹15.80 per litre) after the Centre’s slashing of excise duties were still way steeper than the taxes levied in 2014 – ₹9.48 a litre for petrol and ₹3.57 a litre of diesel.

A similar demand to further cut excise duty has been made by AAP spokesperson in Punjab, Malwinder Singh Kang.

Also read: Burden of fuel tax cuts fully borne by Centre: Nirmala Sitharaman

“The central government should have reduced the excise on diesel and petrol by at least ₹20 and ₹25 per litre respectively. Punjab is already under a severe financial crisis. The state had already reduced the VAT on petrol and diesel to an extent what it could have done,” The Hindu quoted Kang as saying.

However, BJP-ruled states including Uttar Pradesh, Goa, Manipur and Haryana have slashed VAT after the government’s cut down on excise duty. Similarly the AAP government in Delhi and the Kerala government have also reduced VAT on petrol and diesel immediately after the Centre’s announcement.