Formula for uniform VAT rate on diesel

Effective rate to stay fixed, differential paid as subsidy

The empowered committee of state finance ministers on value-added tax (VAT) has come up with a novel solution to encourage states to adopt a uniform floor rate of 20 per cent for diesel.

"It has been suggested that states like Delhi could continue with the 20 per cent tax slab for diesel but reduce the effective rate to 12.5 per cent. The differential could be extended as a subsidy by the Delhi government directly to the oil companies," an official told Business Standard.

The issue had become complex with Delhi adopting the 20 per cent floor rate but other states like Punjab and Haryana maintaining their earlier rates.

Officials said the suggestion was mooted by the chairman of the empowered committee, Asim Dasgupta, for all states so that a uniform floor rate could be achieved for diesel.

Similarly, in the case of LPG also, the Delhi government can maintain the rate at 12.5 per cent but bring down the effective rate to the earlier rate of 8 per cent.

Here also the difference could be extended as a subsidy by the Delhi government. Effectively, on account of the subsidy the prices of diesel and LPG in the capital can come down to the level prevailing earlier.

Delhi government officials, however, said it was difficult to implement the proposal since states like Punjab and Haryana had made it clear that they would not adopt the 20 per cent floor rate.The two states levy 8.8 per cent and 12.5 per cent sales tax on diesel respectively.

"We are considering a rate of around 15 per cent for diesel. If this is approved by the Cabinet, we will have to introduce an Ordinance for the new slab. The entire process could take a month," an official said. Similarly, for LPG, which is under VAT, the Delhi government would have to reduce the rate to 4 per cent.

Speaking to reporters on the sidelines of the meeting, Delhi Finance Minister A K Walia said, "We have received some guidelines from the committee. The prices will be rolled back. However, the extent of the roll back will be finalised only after the matter has been considered by the Cabinet on Wednesday."

Asked if Delhi would suffer revenue losses for reducing the sales tax, Walia said, "We were in fact suffering revenue losses on account of the diversion of diesel sales to other states which we are now trying to correct."