Think other states will lower petrol prices? Dream on

Get real. Other states are unlikely to follow Goa and cut petrol prices.

Goa chief minister Manohar Parrikar may have done the unthinkable by slashing petrol prices in the state by practically abolishing VAT (value-added tax), but it is unlikely to prompt a ‘viral’ reaction among other states.

That’s because most states, especially the larger ones, are struggling to earn revenues and will be unlikely to give up their taxes on fuel, an important source of tax, according to some experts.

[caption id=“attachment_260614” align=“alignleft” width=“380” caption=“State and central taxes account for almost 50 percent of the price of petrol in India AFP”]  [/caption]

State and central taxes account for almost 50 percent of the price of petrol in India, which make the price of petrol per litre much higher than even in the US. Back in November last year, the government admitted that out of every Rs 66.42 that was charged for one litre of petrol (the retail price at the time), about Rs 27 was accounted for by taxes (central excise and local sales tax or VAT).

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Given that both the centre and several states are struggling with fiscal deficits (the fiscal deficit is the gap between government revenues and expediture), it’s unlikely that they will be jumping at the chance to cut taxes significantly.

If anything, they’re in tax-increasing mode. In a bid to narrow its fiscal deficit, the Union Budget increased excise and service taxes by two percentage points. Similarly, states like Maharashtra have also increased taxes on items such as automobiles and LPG (cooking gas) to reduce their revenue deficits.

While media reports suggest that some states are considering a cut in fuel taxes, it’s possible these cuts will not be steep.

“Any cut in taxes on petrol by states will impact their revenues,” Kalpana Jain, senior director, Deloitte Touche Tohmatsu India told Deccan Chronicle. “Wherever taxes on petrol contribute a large revenue to the states it will be difficult for them to follow Goa’s example. They can go for token cuts.”

Yes, going by past record, don’t expect governments to be too generous. Consider the stalemate on the idea of cutting state taxes on aviation turbine fuel (jet fuel). Among the highest in the world, state taxes are practically crippling the aviation industry. Yet no state is rushing to rescue the industry at the cost of tax revenues.

Besides, even if fuel taxes are cut in some states, we’re still headed for a petrol price hike by state-run oil marketing companies soon.

Indeed, this Hindustan Times story on Thursday says that government has already given in-principle approval for companies to hike petrol prices by Rs 4-5 per litre, although a decision on cooking gas and diesel has yet to be taken (they’re worried about how price hikes in both these petro-products will go down with irascible coalition allies like the Trinamool Congress).

In addition, a Business Line report says that petrol dealers, in anticipation of a petrol price hike on 31 March, are threatening to go on an indefinite strike next month if their dealer margins are not hiked as well.

The dealers want a hike in their margins by a minimum Re 0.16 a litre on petrol and about Re 0.60 a litre on diesel. Currently, dealers get Rs 1.49 a litre on petrol and Rs 0.91 a litre for diesel as fixed margin.Higher dealer margins will add to the retail cost of petrol and diesel.

So, don’t get too excited by the prospect of lower petrol prices.