Tax cuts on fuel may not hit states’ revenue

The decision taken by several states to cut local taxes on petroleum products to cushion consumers against this week’s steep hike in fuel prices is unlikely to result in loss of revenue for the state governments, experts and industry groups said on Friday.

Sales taxes and other local levies collected by states also contribute to keeping fuel prices high in the country.

State-level taxes account for about 17 per cent of the retail prices of petrol, 12 per cent for diesel and 4 per cent for cooking gas.

While the fear of political fallout in an election year has prompted several state governments to cut these taxes, their claim that such reductions would result in losses to exchequer is not entirely true, analysts said.

As state taxes on petroleum products are mostly advalorem, which means that they depend on the monetary value of a commodity, there has been a substantial increase in the contribution by the petroleum sector to the state exchequer.

Each time petrol and diesel prices are increased, sales tax collection goes up “as these taxes are calculated on an advalorem basis,” said a senior official in the central government.

The contribution of the petroleum sector to the state budgets has gone up from Rs 29,166 crore in 2002-03 to Rs 38,918 crore in 2004-05 to Rs 55,677 crore in 2007-08.

“State level taxes too have been responsible for the pressure on prices of petroleum products. Sales tax collection from oil sector have consistently been contributing to a third or more of the total sales tax collections of the states,” the government-appointed Committee on Pricing and Taxation of Petroleum Products said in a recent report.

Industry chambers have also called for restructuring of the state tax regime on petroleum products.

“There is scope for restructuring sales tax regime on petroleum products at the state level,” the Federation of Indian Chambers of Commerce and Industry said.