Fuel Tax Cut To Hit States By Rs 44,000 Crore In 2021-22, Says ICRA

The states will have to take a hit of approximately Rs 44,000 crore in terms of tax revenue once they reduce value added tax (VAT) on petrol and diesel, for the remaining part of the current fiscal. At the same time though, higher central tax devolution worth Rs 60,000 crore will to a large extent, offset these losses, rating agency ICRA said.

Amid widespread criticism from all quarters over spiralling fuel prices, the government on November 4 had reduced excise duty on petrol and diesel by Rs 5 and Rs 10 per litre respectively.

After months of calls for lowering the taxes on the fuels, the Centre on November 4 cut excise duty on diesel by Rs 10 a litre and by Rs 5 on petrol.

Since then, 25 states and union territories have reduced VAT on these fuels.

Revenue loss of states from tax cut is around Rs 44,000 crore for the current financial year, out of which Rs 35,000 crore is by way of lower VAT and the rest indirectly, Aditi Nayar, ICRA's chief economist said.

She added that states are not actually losing money as they are getting Rs 60,000 crore of additional revenue from the Centre as part of the higher-than-budgeted tax devolution.

While the Central excise reduction leads to no direct revenue loss to the states, the reduction of VAT, which is levied on an ad valorem basis, the excise cut will lower their VAT inflows by Rs 9,000 crore, Ms Nayar said.

She added that accordingly, the direct revenue loss to the states from VAT cuts is around Rs 35,000 crore, taking the total revenue foregone to around Rs 44,000 crore for the current fiscal, which is in line with the expected revenue loss of the Centre.

Factoring in the impact of the excise duty cut and expectations for mobility and the economic recovery with the rising COVID-19 vaccine coverage, she forecasts the consumption of petrol and diesel to rise 14 per cent and 8 per cent, respectively, in 2021-22.