The Hindu Business Line : Duty cuts may lead to lower Central transfers to States

Sources said here that most States were now braced for lower transfers this year in view of the reduction. Central transfers this year estimated in the Budget for the current fiscal were Rs 82,227 crore, as part of the States' share.

The total revenue realisation from customs and excise duties was estimated at Rs 54,250 crore and Rs 1,09,199 crore, respectively. Of this, States share in both these duties was estimated at Rs 15,289 crore and Rs 25,000 crore, respectively.

But sources said that this share was estimated on the basis of tax rates prevailing when the Budget was presented. The customs rate prevailing then for petroleum products such as motor spirit (petrol) & diesel was 20 per cent and in the case of LPG & kerosene, it was 10 per cent. Both these rates were slashed to 15 per cent and 5 per cent, respectively.

Similarly in excise also, duties were brought down from 26 per cent to 23 per cent in the case of petrol and from 11 per cent to 8 per cent in the case of diesel.

The sources said that these reductions would therefore transfer into a compression of revenue receipts to all the States.

As a result, none of the States were in a position to comply with the demand of the Ministry of Petroleum for reduction in sales tax. They were expecting that the revenue reduction through the Central transfers would be partly neutralised by the increased ST realisations as a result of the high prices.

Sales taxes are on an ad valorem basis, ranging from 20 per cent to 34 per cent in Maharashtra. They comprise almost 80 per cent of the States' internal revenues. Of this, levies on petroleum products alone generated about 45 to 50 per cent of the revenues.

Consequently any reduction in ST, the sources said, would impact its already low tax to SDP (State domestic products) ratios. This ratio for most of the States was in the region of six per cent of the respective SDPs, inclusive of Central transfers.

Instead States were insisting that any reduction in ST in petroleum products be compensated with additional devolution in the form of grants. This was necessary, the sources said, partly not only to offset the revenue losses but also to meet some of their committed Plan and non-Plan expenditure. Unless such additional transfers were made from the Centre, States' fiscal correction would also suffer, the sources added.