The Hindu Business Line : Petro price hike and inflation: Will sales tax rate cuts help?

While the Centre has asked States to slash sales tax rates on petroleum products, there seems to be no correlation between current levies and rates of inflation.

A. Srinivas

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Bangalore, June 5 The political class has reacted sharply to the Rs 5 rise in price for a litre of petrol and Rs 3 in the case of diesel. With the general elections drawing closer, the Congress and its allies have reasons to worry.

The all-India increase in consumer prices for agricultural workers as on March 2008 – an index which roughly records the effect of inflation on the majority of the population – was 7.63 per cent, as compared to prices in March 2007. But there are significant variations from this average. The pressure to neutralise the inflationary impact of fuel price hike will be more on States with high rates of consumer goods inflation.

States’ record

Himachal Pradesh, Gujarat, Assam and Bihar recorded CPI increases of 1.05 per cent, 3.91 per cent, 5.57 per cent and 5.84 per cent, respectively.

However, Haryana, West Bengal, Kerala, Tamil Nadu, Karnataka and Orissa posted inflation rates of 12 per cent, 10 per cent, 8.99 per cent, 9.63 per cent, 9.65 per cent and 9.26 per cent, respectively. Andhra Pradesh (7.42 per cent), Uttar Pradesh (6.27 per cent), Madhya Pradesh (6.85 per cent), Maharashtra (7.44 per cent) and Meghalaya (7.07 per cent) lie between these extremes.

While the Centre has asked States to slash sales tax rates on petroleum products, there seems to be no correlation between current levies and rates of inflation. States with high sales tax rates on petro-products seem to have lower inflation rates than those with lower levies. Therefore, West Bengal, which has announced a cut in sales tax on petroleum products, levies a sales tax of 17 per cent on diesel and 25 per cent on petrol, both of which are lower than the average sales tax rates for the two products.

The average sales tax rate for diesel and petrol are 19.23 per cent and 25.94 per cent, respectively. Madhya Pradesh levies a sales tax of 28.75 per cent on both petrol and diesel, but its inflation rate, at 6.85 per cent, is lower than the national average.

Punjab levies a sales tax of just 8.8 per cent on diesel, yet its consumer price inflation was 8.35 per cent. Gujarat boasts of a low inflation rate, but sales tax rates for diesel and petrol are 24 per cent and 26 per cent, respectively - higher than the national average.

This is not to say that higher petroleum prices will leave inflation untouched. Sales tax rates on petroleum products have remained unchanged, while the prices of other goods have surged ahead. But what a zero correlation between inflation rates and sales tax rates on petrol and diesel does tell us is that inter-State movement of goods from a region of, say, low sales tax rates to high sales tax rates does not necessarily translate into higher prices.

This is despite the fact that inter-State variations in sales tax rates are pronounced in the case of diesel, varying from 8.8 per cent in the case of Punjab to 28.75 per cent in the case of Madhya Pradesh. The abolition of other taxes on transportation, with the introduction of value-added tax, seems to have had a beneficial impact. The Government’s recent move to reduce tax on inter-State movement of goods is a step in the right direction.

Bandh

While the Left has called for a bandh in protest against the petrol and diesel price hike, factors other than high fuel prices have been at work in the current inflationary spurt. Some BJP-ruled States such as Gujarat (3.91 per cent), Rajasthan (5.45 per cent), Madhya Pradesh (6.85 per cent) have fared better at inflation control, while its coalition governments in Orissa and Punjab are exceptions. UPA-run States have a poor record to show in this respect.