Centre And States Ready To Take The Dent With Cuts In VAT On Petrol And Diesel

This Diwali may bring along a bonanza for the consumers of petrol and diesel in India as value added tax (VAT) and excise duties get subsumed.

The cut in value added tax (VAT) on petrol and diesel by some states on Tuesday coupled with the excise duty cuts announced by the central government last week will see a further drop in the prices of these two fuels.

To begin with, Maharashtra and Gujarat (two Bharatiya Janata Party-ruled states) and Himachal Pradesh (Congress-ruled state) have announced reduction in VAT on petrol and diesel and it is expected that more states will follow suit. In most probability, Madhya Pradesh and Karnataka are likely to announce similar cuts soon even as states of Kerala and Odisha are opposed to the move.

This trend also raises expectations of petroleum products being included under goods and service tax (GST) regime, a move that will further bring down the prices of petrol and diesel thereby bringing the retail inflation down and helping the country’s economy as a whole.

However, any decision to bring petroleum products under GST has to be decided by the GST Council.

It may be noted here that a continuous upsurge in global crude oil and petroleum prices had seen domestic prices of petrol and diesel touch new highs and the trend was also reflected in the wholesale price index (WPI) inflation, which increased to 3.24 per cent for the month of August 2017, as compared to 1.88 per cent for the month of July of the same year.

Taxes and duties levied on petroleum products (especially petrol and diesel) form a major chunk of revenues generated by both Centre and the states.

Taking the first step, the central government decided to take a dent of Rs 13,000 crore (in the remaining six months of the fiscal) and reduced the basic excise duty on petrol and diesel by Rs 2 a litre from 4 October 2017, and requested states to reduce VAT on the two fuels by 5 per cent.

On Tuesday, Gujarat took the lead and became the first state to give relief to consumers by reducing VAT on petrol and diesel by 4 per cent.

As a result, petrol will get cheaper in the state by Rs 2.93 and diesel by Rs 2.72 a litre from Wednesday. VAT being levied on petrol and diesel is 28.96 per cent, which after to the tax cut will come down to 24.96 per cent. The loss of revenues to Gujarat on account of this reduction has been projected at around Rs 2,300 crore.

Maharashtra also reduced VAT on petrol and diesel by 4 per cent and announced a reduction in petrol and diesel prices by Rs 2 and Re 1 a litre respectively from Wednesday. As a result, Maharashtra will lose close to Rs 3,000 crore in revenues.

Himachal Pradesh also announced a cut in VAT rates, albeit decided to keep the reduction at 1 per cent. The state charges 27 per cent VAT on petrol and 16 per cent on diesel.

On his part Union Petroleum Minister Dharmendra Pradhan has also been strongly advocating inclusion of petroleum products under the GST regime.

Speaking to media persons on Tuesday, Pradhan said the GST Council is the best example of a federal institution dealing with Centre-state issues and that a decision on inclusion of petroleum products will be taken by consensus. “The responsibility of people’s welfare rests equally with union and state governments,” the minister said.