The Hindu Business Line : Petro products price hike to help boost State revenues

Fund source
Karnataka’s consumption of petroleum products currently ranges between eight and nine million tonnes a year
Power outages, largely accountable for consumption in the past, led to exporters and industries switching from grid to captive power generation
High consumption of petroleum had translated into high revenue earnings for the State because sales tax is levied on an ad valorem basis
It currently levies a sales tax of 12.5% respectively on diesel and naphtha
On petrol, the sales tax rate is currently 20%; on aviation turbine fuel 28%

Our Bureau

Bangalore, July 5 The Centre’s pre-budget hike in petroleum product prices is expected to benefit the States’ revenue-raising efforts, so far hit by falling tax receipts.

Most States have suffered a drop in revenue receipts, after migrating to the value-added tax regime. Besides, with last year’s drop in some of the key tax rates that fall in the divisible pool, the States’ shared tax pool has also taken a hit. Most States are unwilling to admit the drop in revenues. States such as Karnataka that have a high level of export dependency on plantation crops, minerals, textiles and software sector have also seen slippages in tax receipts.

Dependency issues

However, State Government officials maintained that any fall-back options could be taken only after the second half of the year. But, such fall-back options are unlikely, since petroleum was expected to help partially neutralise the impact of a revenue slowdown. States realise at least 35-40 per cent of their gross tax revenues is from the petroleum sector. Karnataka’s consumption of petroleum products currently ranges between eight and nine million tonnes a year. Consumption in the past was also largely on account of the power outages, leading to exporters and industries switching from grid to captive power generation.

The high consumption of petroleum had translated into high revenue earnings for the State. This was because sales tax by the States is currently levied on an ad valorem basis. Karnataka currently levies a sales tax of 12.5 per cent on diesel and naphtha.

On petrol, the sales tax rate is currently 20 per cent and on aviation turbine fuel it is 28 per cent. As a result for every rupee increase in the price of petroleum products revenue impact on the States was to the extent of 20 paise in the case of petrol, and 12.5 paise in the case of diesel.

Affected parties

Consequently, the ad valorem structure allows the State to increase its revenue receipts in tandem with increased prices. However, this year, with the industrial slowdown, some decrease in the consumption of petroleum products was also expected. Nevertheless, indications are that diesel consumption for transportation and the Railways have so far not been affected. But States’ earnings from the ATF sales have taken a hit as private sector airlines have pruned their flights, in view of falling air traffic.

However, officials also indicated that given the tight revenue situation of most states, few were likely to agree with the Ministry of Petroleum and Natural Gas’ request for cutting back sales tax on petroleum products. The officials said that unless that the Centre was prepared to compensate for the States’ loss of revenues from the sector, they were not prepared to forego tax revenues. This was especially so in an environment where States are expected to make large revenue expenditure to mitigate the impact of the slowdown.

More Stories on : Petroleum | States | Karnataka

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