In a bid to lower the impact of an unavoidable hike in petrol and diesel prices, Oil Minister Murli Deora has asked states like Delhi and Andhra Pradesh to lower sales tax (VAT) on auto fuels and shift towards specific rates.
As the government considers freeing petrol and diesel prices, which may result in a rate hike of up to Rs 3.8 a litre, Deora has written to state chief ministers seeking reduction and rationalisation of sales tax/VAT.
"A rise in the international oil prices exerts an upward pressure on domestic prices of petroleum products," he wrote. "Ad valorem rates of VAT imposed by the state government further aggravates the impact of international oil prices on the consumers."
Andhra Pradesh levies the highest sales tax of 33 per cent on petrol in the country, followed by Tamil Nadu, where it is 30 per cent. Kerala, which levies 29.01 per cent VAT on petrol, has the highest sales tax rate for diesel at 24.69 per cent.
Pondicherry has the lowest sales tax or VAT on petrol in the country at 15 per cent, while Haryana and Punjab have the lowest rates for diesel at 8.8 per cent.
Any increase in fuel prices by oil companies has a cascading effect on retail rates paid by consumers due to the ad valorem nature of the state sales tax.
"...The VAT rates are very high in most of the states, and need to be reduced," Deora said.
"VAT is levied by state governments on an ad valorem basis, i.e., as a percentage of the price of the product. This means that when oil prices are high, the taxation on the products is higher, rendering the product even more expensive," he said.
"To address this issue, the ad valorem component of the VAT can be converted into a specific component, at current levels," he said.
An Empowered Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee is deliberating on freeing petrol and diesel prices from government control. If approved, petrol prices will go up by Rs 3.73 a litre and diesel by Rs 3.80 per litre.
Without a price hike, state-owned oil firms stand to lose a whopping Rs 74,300 crore in revenues this fiscal.
Deora said the central government had already done away with the ad valorem component of excise duty on petrol and diesel and the duty has been made specific.
"Also, some of the states are levying high VAT rates on products like PDS kerosene, which needs to be looked into in view of its usage in lighting and cooking purposes by the common man," he wrote.
Urging an early action, Deora asked the chief ministers to have this subject reviewed at an early date so that the much needed tax reforms can be implemented. Levying specific VAT rates instead of ad valorem rates will help cushion the effect of a rise in international oil prices.
"While I appreciate your need for revenue mobilisation, the current high levels of local taxes on petroleum products are clearly unsustainable, if we are to protect the interests of the consumers, partiularly the vulnerable sections of the society," he wrote.
The minister underscored the commitment of the central government to ensuring supply of essential fuels to the common man at affordable rates.
"To achieve this objectie, the central government has provided financial assistance of Rs 26,000 crore to the public sector oil marketing companies, while the upstream oil PSUs have contributed Rs 14,430 crore in 2009-10," he wrote.
