While the Union government is yet to make up its mind on the freeing of petrol prices, it has written to the state governments to switch over to specific rates for value added tax on petrol and diesel instead of the current ad-valorem (percentage) structure.
In an indication that the Centre may allow oil companies to increase the prices, it has suggested the change in order “to cushion” the impact of increase in international oil prices.
In a recent letter to chief ministers, petroleum minister Murli Deora said a rise in the international oil prices exerts an upward pressure on domestic prices of petroleum products. “Ad-valorem rates of VAT imposed by the state governments further aggravates the impact of international oil prices on the consumer.”
Interestingly, he has written to the chief ministers to switch to the specific rates even as the government is yet to take a decision on increasing the price of the two auto fuel.
Any change in the VAT structure without any revision in retail selling price (RSP) does not mean anything if the states freeze the specific duty at the current level. The change will be a positive for consumers only if there is an increase in RSP after the change in VAT structure.
Though it is expected that the Centre will allow its marketing companies to increase the price of petrol by around Rs 3, it may not go in for an increase in diesel prices.
An empowered group of ministers, headed by Finance Minister Pranab Mukherjee, is expected to take a decision on it later this week or early next week. The government-controlled oil marketing companies are incurring a revenue loss of Rs 3.73 a litre on petrol, Rs 3.8 on diesel, Rs 18.82 on kerosene and Rs 261.90 on a LPG cylinder.
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Deora said the VAT rates were very high in most states. The VAT on petrol is as high as 33 per cent in Andhra Pradesh and on diesel it is 24.7 per cent in Kerala. An ad-valorem rate means a cascading impact when petroleum product prices are increased, since the taxation on the products also increases, rendering the product even more expensive.
Though the Centre had done away with the ad-valorem component on excise duty on auto fuels completely when international petroleum prices peaked, it increased the specific duty on petrol and diesel by Re 1, imposed a 5 per cent customs duty on crude oil and hiked customs duty on petroleum products except LPG and kerosene by 5 percentage point.
The excise duty on petrol and diesel is Rs 14.78 and Rs 4.74 a litre, respectively. The underrecovery on petrol in 2009-10 stood at Rs 5,151 crore while the underrecovery on diesel was Rs 9,279 crore. However, the excise collection from these products was much higher at Rs 21,075 crore (petrol) and Rs 21,537 crore (diesel).
Deora pointed out in the letter that the some states are levying high VAT rates on a product like PDS Kerosene. Bihar, for instance, levies 12.5 per cent VAT on kerosene. The Centre does not levy any tax on PDS kerosene and domestic LPG.