The Hindu Business Line : States rule out reduction in sales tax on petro products

Some of the States have pointed out that a reduction in sales tax and a increase in prices would in fact adversely affect them more and impact fiscal correction.

Bangalore , Sept. 4

STATES have ruled out any reduction in sales tax on petroleum products to offset the inflationary impact of an impending price hike.

Sources said that any reduction in sales tax on petroleum products would result in compression of revenue receipts. This year, the States have realised high revenues and most States have realised revenues well above their targeted receipts.

The increase in revenue receipts has more than neutralised the marginal losses in revenues due to the value-added tax implementation since the beginning of this fiscal year.

Petroleum taxes are based on an ad valorem basis.

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. For most of the States at least 45 per cent of the sales tax receipts come from petroleum products. Consequently, few States are prepared to forego this source of revenue. At present, there are about 23,000 retail outlets of petroleum products in the country.

In addition to this, States also realise ST revenues from sale of diesel to the Railways and aviation turbine fuel to airlines.

As a result of the revenue impact, few States were opposed to a hike in prices of petroleum products.

The sources said that any reduction in sales taxes at this juncture would adversely hit their revenue resources.

In fact some of them said it was on account of the increase in revenues from petroleum products that many of them had so far not sought any compensation from the Centre for the shift to the value-added tax.

In fact it was on account of the revenue impact that States had also turned down a proposal of the oil industry for switching over to an absolute level of taxation instead of the ad valorem basis.

This would have meant that the realisation would be fixed on the basis of the sales of the product, rather than the price. But States had then turned down the proposal in view of revenue implications.

Some of the States have pointed out that a reduction in sales tax and a increase in prices would in fact adversely affect them more and impact fiscal correction.

This was also partly on account of the higher interest costs for their respective borrowings above the figures estimated in the respective State budgets.

States had estimated their respective interest costs at around 6.5 per cent, though the actual market rates were over 7.5 per cent for most of them.

Any reduction in ST for States at this juncture would mean an escalation in revenue deficits. None of the States are prepared to risk that for the moment.

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