Fuel Tax Tussle: Who Can Afford To Cut Taxes, Centre Or States?

Opposition parties called a nationwide strike to protest against record-high auto fuel prices even as central and state governments expect the other to lower taxes to cushion consumers.

Petrol and diesel prices were retailing at a record Rs 88.12 and Rs 77.32 a litre, respectively, in Mumbai and Rs 80.73 and 72.83 a litre, in New Delhi today, according to Indian Oil Corporation Ltd.'s website. Both central and state levies combined account for up to 45 percent of the retail price as the value-added tax varies with each state. States not ruled by the Bharatiya Janata Party want the Narendra Modi government to lower taxes as it increased the excise duty nine times after coming to power in 2014.

Yet, according to Madan Sabnavis, chief economist at Chief CARE Ratings, it's the states that can afford to cut taxes compared to the central government because they tax petrol and diesel ‘ad valorem'—charged on the value of a transaction. On a higher base, a cut in taxes in percentage terms would make minimal difference to state finances, he said, adding that the central government, which charges excise duty per litre, stands to take a bigger hit.

Kerala Finance Minister Thomas Isaac called the proposal for states to cut taxes “preposterous”. The central government has many more options than states to raise revenue, he said. The implementation of the Goods and Services Tax has further reduced the “flexibility” of states to gain revenues.

Bringing petrol and diesel under the ambit of the GST is often cited as a long-term solution to ease the burden of high fuel prices on the common man. Sabnavis said that's easier said than done, because the current rate of taxation is 100 percent for petrol and 67 percent for diesel. Clearly, he said, these rates don't fall into any of the existing GST tax slabs.