The Hindu Business Line : States step in to absorb part of fuel price hike

New Delhi, June 5 State Governments seem to be coming to the rescue of the Centre to cushion the impact of the steepest-ever price hike on auto fuels and LPG on the public, by reducing their share of tax component.

The decision may lessen the burden on the consumer pocket by about Rs 2 on petrol and Re 1 on diesel as the oil marketing companies (OMCs) plan to pass on the benefits to the users.

The Government had on Wednesday come out with a compensation package that included a price hike, to bail out the bleeding public sector OMCs.

Taking the lead, West Bengal decided to reduce sales tax on petrol and diesel on Wednesday. Joining it on Thursday were the Governments of Bihar, Tamil Nadu and Delhi. While Bihar has reduced sales tax on petrol and diesel, Tamil Nadu has effected a cut on diesel, and Delhi has subsidised domestic LPG.

Speaking to Business Line, a senior OMC official said, “We are still working out the numbers to calculate the net impact of the sales tax reductions being announced by the respective State Governments that can be passed on to the consumer. The companies pass on the entire benefit to the consumer.”

To bail out the OMCs from suffering an estimated under-recovery of Rs 2,45,305 crore for the current fiscal for selling the petroleum products — petrol, diesel, LPG and kerosene — below the cost price, the Government had announced an increase in petrol price by Rs 5 a litre, diesel by Rs 3 a litre and LPG by Rs 50 a cylinder. The price hike came along with customs and excise duty cuts, higher contribution by upstream oil companies and oil bonds.

Tax matter

The retail selling price of these products varies from State to State on account of differences in freight, siding/shunting charges and State-specific levies such as State surcharge, VAT rate, cess, octroi, and entry tax. The subject matter of sales tax comes under the purview of the State Governments and the tax component in some States is as high as 33 per cent on petrol and 29.13 per cent on diesel. Consequent to the Finance Bill, 2006, domestic LPG has become a ‘declared good’ under the CST Act and the maximum sales tax/VAT rate, therefore, is four per cent.

Elaborating on how the benefit of sales tax cut is being passed on to the consumer, the official said, if we take a notional number of Rs 30 a litre as price of a product before sales tax and if the tax component is 20 per cent, that is Rs 6, then the retail selling price of the product works out to be Rs 36 a litre. If the sales tax is slashed by 2 per cent, then the tax component would be reduced by 60 paise and the price of the product would also be reduced to the extent.

Following the hike on Wednesday, the Prime Minister, Dr Manmohan Singh, in his address to the nation had said, “The Central Government, oil companies and consumers are bearing a part of this immense burden. It is, therefore, incumbent upon State Governments, many of whom tax petroleum products substantially, to also contribute to this national effort by suitably reducing State taxes and levies.”

The Congress President Sonia Gandhi also asked Chief Ministers of her party-led States to effect a cut in sales tax on petroleum products. Taking a similar step, the BJP has also asked its chief ministers to cut sales tax on fuels.

The Delhi Government on Thursday announced subsidy on LPG, resulting in LPG rate increase of Rs 10 instead of Rs 50 per cylinder. Bihar Government reduced sales tax on petrol by 2.5 per cent and 1.64 per cent on ordinary and high-speed diesel.

The contribution of the petroleum sector towards customs and excise duties to the Central exchequer for 2006-07 stood at Rs 68,864 crore (Rs 61,221 crore in 2005-06). The contribution to the States’ kitty in the form of sales tax, royalties, octroi, etc was Rs 62,121 crore for 2006-07.

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More Stories on : Petroleum | States | Taxation

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