Explained | States vs. Center: Which Government. Increase in the mineral oil tax rate?


How do opposition-ruled states view VAT cuts to lower gas prices?

How do opposition-ruled states view VAT cuts to lower gas prices?

The story so far: Petrol sells for more than £100 a liter across India. While rising crude oil prices have compounded the strain, the main reason for the sharp rise in dispenser fuel prices in recent years is the gradually increasing central government excise duty component. The center currently collects £27.9 in tax per liter of petrol, compared to around £10.4 in 2014. That’s the difference after tariffs were cut by £5 a liter last November. While some states have followed in the center’s footsteps by reducing value-added tax (VAT), many others have not. On Wednesday, Prime Minister Narendra Modi said fuel prices in some non-BJP-ruled states were too high because they failed to pass on the benefits of the center’s consumption tax cut to the public. He said states such as Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala and Jharkhand did not reduce VAT last November, while Karnataka and Gujarat did.

What is the opposition saying?

Kerala Finance Minister KN Balagopal said the state has not increased the sales tax on gasoline and diesel for the past six years. “So what should we reduce?” he asked. Similarly, Telangana Chief Minister K. Chandrasekhar Rao said his government has not increased the fuel tax since 2015. West Bengal Chief Minister Mamata Banerjee added: “We wanted the prices of petroleum products to be reduced but the PM is urging states to cut taxes.” Where are we going to do this from?”

By how much has the central tax on fuel increased recently?

A comparison of state tax rates and central excise taxes on gasoline over similar periods helps decipher the impact of both taxes on retail prices. However, since past tax rate data is not archived by the government and since state and central tax effectiveness dates do not coincide, appropriate dates were selected to make the comparison robust.

The price of gasoline in Chennai on April 24, 2022 was ₹110.93 per liter.

The price of gasoline in Chennai on April 24, 2022 was ₹110.93 per liter. | Photo Credit: KARUNAKARAN M

As of October 2018, the central excise duty on gasoline consisted of three components: ₹2.98 per liter was levied as a basic excise duty, ₹7 per liter was special additional excise duty, and ₹8 per liter was labeled as a road infrastructure charge. Taken together, the central component came to £17.98 per liter of petrol. Until February 2022, the central excise tax on gasoline consisted of four components: ₹1.40 per liter was levied as a basic consumption tax, ₹11 per liter was levied as a special additional consumption tax, ₹2.5 per liter was labeled as an agricultural infrastructure and development levy, and ₹13 per liter was charged for road and infrastructure charges. Taken together, the mean component was ₹27.9 per liter of gasoline.

During the reporting period, the center’s tax share increased by approximately ₹10 per liter of gasoline.

By how much has the tax collected by states increased?

As of February 2019, Kerala charged 30.08% as sales tax along with ₹1/litre additional sales tax; plus, 1% was calculated as Cess. Telangana calculated 35.2%. West Bengal charged 25% or £13.12 per liter whichever was higher, with minor additional components. None of the three states had increased rates as of April 2022.

Tamil Nadu charges 34% VAT on petrol since February 2019. In 2022 the tax structure has changed to 13% VAT and a flat rate of ₹11.52 per litre.

In the period under review, the fuel tax in Andhra Pradesh and Maharashtra (Mumbai) increased by ₹3 per liter. Karnataka’s sales tax rate fell from 32% to 25.92% and Gujarat’s from 17% to 13.7%. In summary, non-BJP governed rate increases ranged from zero to ₹3 per liter during this period. In the states ruled by the BJP, tax rates fell.

How to measure the impact of state taxes and center excise taxes on gasoline?

Given the different tax rates between the central and state governments, it is important to standardize them before comparing.

One way to do this would be to compare the Center’s excise tax collections on crude oil and petroleum products and the states’ sales tax collections on petroleum products as a percentage of GDP. Between FY15 and FY21, the center’s tax revenue increased from 0.79% of GDP to 1.88% of GDP. Over the same period, government tax revenues fell slightly from 1.1% of GDP to 1.02% of GDP.

Another measure would be to compare the center’s tax share of the retail price of gasoline with the states’ tax share. In Delhi, for example, the tax portion of the center currently accounts for 26.4% of the retail price. In May 2014 it was around 14%. The state tax share is currently 16.25% of the retail price, compared to 17% in May 2014.

Thus, state tax revenues, both as a percentage of GDP and in retail prices, have remained the same or even declined slightly, while central tax revenues have risen sharply.

Another key difference is that the center’s tax rate is a fixed value, while most state tax rates are calculated as a percentage. That is, a state’s tax collection depends on the base price, dealer commission, and excise components, but the center’s does not.

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