States need to diversify their revenue sources, for which a rational Goods and Service Tax regime is a step in the right direction.

Bihar Chief Minister, Nitish Kumar, deserves to be congratulated for lowering the value added tax (VAT) on diesel, enabling it to be cheaper by 85 paise a litre in the State. This comes even as all Congress-ruled States have decided to offer nine subsidised LPG cylinders per year for every household – as opposed to the cap of six fixed by the Union Cabinet last week – and bear the additional costs on this count themselves. These moves signify a growing realisation among States that they cannot expect the public sector oil marketing companies (OMC), or the Centre, to forever foot the bill for making petroleum products affordable to their populations. It’s time for them to pitch in as well and reduce their current overdependence on revenues from these products.

In 2011-12, the States together grossed a fourth of their tax revenues through VAT/sales tax, entry tax, octroi and other levies imposed on petro-products, in contrast to a dependence of a mere one-tenth in the case of the Centre. Not only do the States mop up more; if one adjusts further for the Centre’s transfers to the OMCs by way of subsidy to partially offset their under-recoveries, its overall revenue reliance on petro-products stands still further reduced today. Moreover, while the Centre has moved to fixed specific excise duties on diesel or petrol, the States charge ad valorem rates, yielding them more revenue with every price hike. Bihar, for instance, was imposing an 18 per cent VAT on diesel. Even after reducing that now to 16 per cent, Nitish Kumar’s Government would effectively realise just as much revenue for every litre sold as it was collecting earlier. All that he has done is to be somewhat kinder, by not benefiting from the increase in the basic fuel price! What stops Mamata Banerjee from following suit in West Bengal?

All this only further reinforces the need for States to diversify their revenue sources, for which implementing a comprehensive Goods and Service Tax regime with minimal exemptions is certainly a way forward. This is not to say governments shouldn’t tax petro-products. On the contrary, given that India imports much of its energy requirements, taxation policy can definitely supplement other measures to restrain fuel consumption to levels that are economically sustainable and simultaneously also equitable. That would mean not overtaxing petro-products, to the point of shutting out those making a transition from firewood or dung-cakes to kerosene and LPG, or seeking improved mobility possibilities through first-time ownership of two-wheelers. There is more equity in raising duties on diesel cars and SUVs, rather than excessively taxing the fuel itself to the greater detriment of less well-off consumers. Ultimately, revenues from petro-products should be a means, not an end.

(This article was published on September 21, 2012)
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