The Hindu Business Line : Petro price hike, boon to State revenues

This is the reason. Sales tax on petroleum products is levied at 20 per cent ad valorem in most States, though some such as Maharashtra, have rates up to 34 per cent. This effectively implied that for every rupee increase in diesel or petrol prices, the benefit to States was around 20 paise.

In fact almost 40 per cent sales tax revenues for some of the large States come from levies on petroleum products. For some, it was as high as 55 per cent.

Conservative estimates indicated that sales tax receipts of all the States were likely to top Rs 1,25,000 crore this year. The increased receipts were expected to be largely driven by petroleum products and the cascading effect of fuel prices.

States have about 21,000 retail outlets of all the major petroleum companies. These outlets account for sales of about 35 million tonnes of diesel, the largest customer being the road transport sector. But even the Indian Railways, also another large consumer of diesel, was liable for sales tax.

In addition, there are close to about 80 million customers of liquid petroleum gas, who would also be impacted by the rising prices.

Fuel price increases are all passed through and this was one of the major inflation drivers. Consequently, the oil companies and the Union Ministry of Petroleum have asked the States to reduce the rate of taxes or opt for absolute levels of taxation to partially neutralise the impact of the price increases.

But sources said here that none of the States were prepared to a reduction or a switchover to alternative methods of taxation. This year as a result, some of the States are expected to see higher tax to State domestic product ratios.

States, the sources said, hoped that the incremental revenues due to the petroleum price increases would help in their respective fiscal correction efforts.

Oil industry proposals could be considered, the sources said only if the States had alternative taxation mechanisms available for additional resource mobilisation.

Unfortunately for most States in the country, sales tax constituted the single largest source of tax revenues. As a result, few are prepared to let go this opportunity to increase tax revenues, before the introduction of the value-added tax comes into operation. But petroleum products would be kept out of the purview of VAT.

But there was also a flip side to these expectations. Revenue expenditure for the States would also show large increases as a result of the high inflation. This escalation would translate into higher dearness allowance compensation to employees/pensioners in the State Governments, the sources added.

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