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States turn down oil industry proposal for fixed tax structure

C. Shivkumar

Bangalore , June 17

MOST of the States have turned down a proposal by the oil industry and supported by the Ministry of Petroleum to shift from an ad valorem sales tax structure to an absolute figure.

Sources said here that the proposal was mooted in a bid to partially negate the inflationary impact of petroleum product price hikes. The proposal involved partially insulating retail petrol/diesel prices from the volatile fluctuations.

At present taxes and duties constitute almost 65 to 70 per cent of the basic prices, and substantial component of this comprised sales tax levies by States. Sales tax rates range from 12 per cent to 34 per cent on both diesel and petrol. The highest rates being in Maharastra where the sales tax on petrol was 30 per cent and diesel was 34 per cent.

Among the proposal submitted by the oil industry to the Petroleum Ministry, included a shift from an ad-valorem tax structure to a fixed structure. An inverse structure was also put forward where the duty falls when prices of petrol/diesel are hiked and vice versa. These formulae were offered as revenue neutral alternatives to States. This implied that the State Government revenues would not have negative fallout in the event of changes in sales tax rates. The ad-valorem structure currently adopted implied that every time the prices were hiked, the tax incidence on the retail prices also went up.

But high level sources said here that none of the states was prepared to accept oil industry proposal. States have instead disputed the revenue neutrality of the proposal. They have argued that such a proposal, if implemented, would have a negative fallout on the growth of their revenue receipts. Karnataka's Deputy Chief Minister and the Finance Minister, Mr Siddaramiah, said, "How can we consider proposals which have no positive impact on states revenues."

Sales tax receipts from petroleum products comprise almost 40 per cent of their gross sales tax receipts. In some states it was as high as 55 per cent. With every increase in petroleum prices States have showed dramatic revenue increases. In fact some of the states argued, that reduction in petroleum price during the last two years actually resulted in reduced revenue growth rates.

Besides, the sources said, the oil industry proposals could be considered only if the States have alternative taxation mechanisms available for additional resource mobilisation. Unfortunately, for most States in the country, sales tax constitutes the single largest source of tax revenues. Therefore, unless an alternative method of compensation was found for neutralising the possible loss of revenues, none of the States was prepared to consider the oil industry proposal. Instead, what most states are prepared to consider was a reduced tax rates, though the ad-valorem structure would remain in tact.

States were also reluctant to accept the proposal in view of the impending shift to a value added tax (VAT) regime. Such a regime was expected to lead to compression in revenue receipts during the initial years. Accordingly, the sources said, adopting an alternative formula would be double blow for the States, especially since most states were involved in fiscal correction.

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