Fuel tax cuts to impact states' kitty by Rs 44,000 cr in FY22: Icra

While the Centre has reduced the road cess component of excise duty which is not shared with states, the cut will bring down the VAT kitty by Rs 9,000 crore, rating agency says

Rating agency Icra has pegged the revenue loss to the states at Rs 44,000 crore from central excise duty and state-level value added tax cuts on petrol and diesel during the current financial year.

While the Centre has reduced the road cess component of excise duty which is not shared with states, the cut will bring down the VAT kitty by Rs 9,000 crore since the state tax is imposed on ad valorem basis, Icra chief economist Aditi Nayar said.

She also tentatively estimated the losses to the states at Rs 35,000 crore from VAT cuts. So far, 25 states and union territories have reduced VAT on petrol and diesel.

The rating agency said the loss to the states' kitty at Rs 44,000 crore is in line with the expected revenue loss of the Centre.

However, the finance ministry has estimated its loss at Rs 60,000 crore for the last five months of the current financial year.

Icra expects the central tax devolution to exceed the budget estimates by a substantial Rs 60,000 crore. The BE kept it at Rs 6.7 trillion. Despite this, the tax devolution to the states was nearly unchanged at Rs 2.6 trillion in the first half of FY21 and FY22. In monthly terms, the devolution amount stepped up to Rs 47,500 crore each in July-September 2021 from Rs 39,200 crore each in the previous three months.

If the monthly amount of tax devolution is kept at Rs 47,500 crore during October-February FY22, then the Centre would give around Rs 2.3 trillion to the states in March which will be insufficient in terms of cash flow for the states.

"Accordingly, there is a renewed case for the Centre to increase the monthly devolution to the states to avoid back-ended transfers. The revenue visibility will enhance confidence and allow the states to expedite expenditure, especially growth supportive capital spending,” Nayar said.