Opposition states follow Centre, reduce VAT on petrol and diesel

The tax incidence on petrol and diesel in states has come down more than what was announced by the Centre due to the ad valorem structure of the value-added tax (VAT) on fuel.

Following the Centre’s lead, the Chief Minister Ashok Gehlot-led Rajasthan government on Saturday slashed VAT on fuels in the state.

“Due to the reduction in the prices of petrol and diesel by the central government, the state government will reduce VAT by Rs 2.48 per litre on petrol and Rs 1.16 per litre on diesel. With this, petrol will be cheaper by Rs 10.48 and diesel by Rs 7.16 per litre in the state,” tweeted Gehlot.

In a social media post, Kerala Finance Minister K N Balagopal said: “The Union government has partially reduced the huge tax on petrol and diesel. The Kerala government welcomes this decision. In accordance with the Centre’s decision, the Kerala government would also bring down taxes on petrol by Rs 2.41 a litre and diesel by Rs 1.36 a litre.”

Kerala is also readying for a by-election in Thrikkakara constituency on May 31. Sources, however, indicated that the cut by Kerala was based on an ad valorem rate — a percentage based on central taxes.

According to reports, in Odisha, the central excise duty will reduce the price of petrol by Rs 8 per litre, while the state will automatically forgo another Rs 2.23 per litre on petrol and Rs 1.36 per litre.

Among Opposition states, Tamil Nadu Finance Minister Palanivel Thiaga Rajan was critical of Union Finance Minister Nirmala Sitharaman, urging states for reduction in state taxes.

“The central government didn’t inform, let alone ask for any state’s view when it increased Union taxes on petrol by Rs 23 per litre (over 250 per cent) and diesel Rs 29 per litre (over 900 per cent) from 2014. After rolling back 50 per cent of the increases, the Centre is exhorting states to cut. Is this federalism?” asked Thiaga Rajan.

Asking the Union government to further reduce taxes, Thiaga Rajan said the state is set to see a revenue loss of around Rs 800 crore due to the current excise duty cut by the Centre. During the November cut by the Centre, the state had lost Rs 1,050 crore of additional revenue on an annual basis. He said although the Centre has reduced taxes, it is still higher than the 2014 rates by Rs 10.42 per litre for petrol and Rs 12.23 per litre for diesel.

A day after the Centre on Saturday announced a record Rs 8 per litre cut in excise duty on petrol and Rs 6 per litre reduction on diesel, the Maharashtra government on Sunday reduced VAT on per litre petrol by Rs 2.08 and diesel by Rs 1.44.

A statement issued by the government said the state exchequer will have to bear an annual loss of Rs 2,460 crore as a result of this decision. After reducing the VAT on fuel, the per month revenue from petrol will come down by Rs 80 crore, while that from diesel by Rs 125 crore, it said.

Following the Centre’s move, Union Minister for Petroleum and Natural Gas Hardeep Singh Puri highlighted in a tweet that despite the second reduction in central excise, the price of petrol and diesel in Maharashtra, Rajasthan, West Bengal, Tamil Nadu, Andhra Pradesh, Jharkhand, and Kerala remains Rs 10-15 higher than in the Bharatiya Janata Party (BJP)-ruled states. This is due to the refusal of the respective state governments to reduce VAT.

However, among BJP-ruled states, Gujarat was unlikely to follow suit and reduce VAT on petrol and diesel, said senior officials. “We are trying to figure out if there will be any impact on state revenue,” said a senior government official.

State Finance Minister Kanubhai Desai told Business Standard in a text message that “Gujarat had already reduced VAT on petrol and diesel earlier”. In November 2021, the Gujarat government had reduced VAT on petrol and diesel by Rs 7 per litre, hours after the Centre had slashed excise duty on both fuels.

With inputs from PTI