The continuous rise in petroleum product prices may have affected your budget, but it is certainly going to benefit the States as it is likely to lower their overall deficit in the next fiscal (2013-14).

India Ratings and Research in its ‘States’ Public Finance Outlook’ has said, “States’ aggregate fiscal deficit in FY 14 (2013-14) is estimated to correct to 2.3 per cent of GDP from 2.4 per cent in FY 13 (2012-13).” The Fitch Group research company has maintained a Stable Outlook on the State Government Guaranteed Debt Programmes for FY14.

Chief Economist and Head (Public Finance) of the company Devendra Kumar Pant said, “Value Added Tax (VAT/Sales Tax collection on petroleum products in States are going up and it is expected to be higher in 2013-14.” Interestingly, the Centre’s tax collection is going down.

The answer to such reasoning lies in the ad valorem tax method. Now, the Centre and States collect tax as a fixed percentage of the value. If the oil marketing companies (OMCs) raise the price of petrol and diesel, States will get a higher base to levy VAT/sales tax. Since the OMCs have been allowed to raise diesel prices in small quantity on regular basis, it is helping the States.

Pant explained that for the Centre, tax collection on oil is down by over four per cent during the first half of the current fiscal, while for the States, it rose by over 15 per cent. At the same time, contribution of petroleum products in total tax collection for States grew to 33 per cent in 2011-12 from 31.9 per cent in 2010-11.

Talking about the outlook for States’ public finance during the current fiscal, Pant said that India Ratings expects slippage in aggregate fiscal deficit of States in FY13 to be 0.3 per cent, from the budgeted fiscal deficit of 2.1 per cent. Unlike the earlier episode of fiscal slippage in FY09, the slippage in FY13 is expected to be lower due to absence of adverse shock of salary revision, he added.

(This article was published on February 14, 2013)
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