Why are states so reluctant to cut petrol taxes?

Nearly 40 percent of the price of petrol is made up of taxes by the centre and the states. Yet neither side one wants to change that situation fundamentally.

After the central government allowed state-run oil marketing companies to hike petrol prices by Rs 6.28 per litre, leading to an overall increase of about Rs 7.50 per litre because of a consequent increase in state taxes, there have been growing calls for states to reduce their taxes on the fuel to ease the aam aadmi's burden.

But are states -- or the centre -- really in a position to cut taxes? A Business Standard report on Monday provided details on how much is actually charged as tax on petrol in various states. It pointed out that several states now charge more taxes on petrol than the centre.

 Why are states so reluctant to cut petrol taxes?

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According to the report, the central government levies a fixed excise duty of about Rs 14.78 per litre of petrol. In comparison, states impose an ad valorem (value-added) tax, which increases every time the price of the fuel increases. The extent of the tax (plus surcharges) varies across states. In West Bengal, for instance, the state's tax on the fuel increased to Rs 16.08 per litre after the fuel price hike, which is higher than the central excise duty. (The state's firebrand leader, Mamata Banerjee, while demanding a rollback of the petrol price hike, has said nothing about reducing state taxes to offer relief to the common man).

In Mumbai, the state's tax on petrol now totals Rs 16.70 per litre, the newspaper said. In Hyderabad, it's as high as Rs 19.83, while Delhi has the lowest state tax on petrol of Rs 12.20 per litre.

As the report notes, "state governments levy sales tax/VAT on petrol ranging from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh, making it a major source of income". No wonder they don't want to give it up.

While the central government is leaning heavily on Congress-ruled states to cut taxes, the fact is that the precarious fiscal position of most states leaves little room for them to lower taxes.

Maharashtra's chief minister, Prithviraj Chavan, for instance, told reporters that cutting taxes on petrol was unfeasible because that would mean lower funds for development, adding that value added tax brought in more than 70 percent of the state's revenues, according to The Hindustan Times.

Of course, at least one state has slashed sales tax dramatically in recent months: BJP-ruled Goa. A few months ago, it cut nearly its entire tax on petrol, making the fuel cheaper by Rs 11 per litre. But no other state really followed Goa's example.

After the recent hike, Kerala and Uttarakhand did waive off the increase in VAT, which lowered the price by about Rs 1.60-1.90 per litre in those states. It's very possible, however, that instead of Congress-ruled states, Opposition-ruled states might be more willing to consider VAT cuts, not because they can, but to generate some political mileage.

For now though, the pressure is on to keep the focus on the central government. Some opposition political parties -- and some Congress allies -- are ready to go on strike to ensure the central government rolls back the petrol price hike.

As the political games continue, consumers pay the (high) price.

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Updated Date: Dec 20, 2014 10:23:53 IST