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Is State’s sales tax the reason behind the increase in fuel prices?

Petrol prices are hovering over Rs.100 a litre across India. The primary reason has been the sharp increase in the central excise duty over the past few years.

The excise duty was reduced by Rs.5 per litre last November. While some states followed a cut in value-added tax (VAT), many others did not. On Wednesday, Prime Minister Narendra Modi said fuel prices were too high in some non-BJP-ruled states as they did not pass the benefits of the Centre’s excise cut to consumers.

He said States such as Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, and Jharkhand did not reduce VAT last November, while Karnataka and Gujrat did so.

In October 2018, the Central excise duty on petrol amounted to Rs.17.98 per litre. In February 2022, it increased to Rs.27.9 per litre of gasoline. In this period, the Centre’s tax component expanded by about Rs.10 per litre of petrol.

As of February 2019, Kerala charged 30.08% as sales tax and Rs.1 a litre additional sales tax, plus a 1% cess. Telangana set 35.2%. West Bengal set 25% or Rs.13.12 per litre, whichever was higher, with minor additional components. Tamil Nadu levied 34% VAT on petrol as of February 2019. In 2022, the tax structure has changed to 13% VAT plus Rs.11.52 a litre.

In the period under review, Andhra Pradesh and Maharashtra’s tax on petrol has risen by Rs.3 a litre, whereas Karnataka’s sales tax rate has declined from 32% to 25.92%, and Gujrat’s from 17% to 13.7%. In the non-BJP-ruled states, tax rates increased between zero and Rs in this period. Three per litre, whereas in the BJP-rules States, tax rates declined.

Between FY15 and FY21, the Centre’s tax collections have increased from 0.79% to 1.88% of GDP. States’ tax collections have marginally declined from 1.1% to 1.02% of GDP in the same period.

Regarding percentage of GDP and retail prices, the States’ tax collections have remained the same or even slightly declined, whereas the Centre’s tax collections have climbed sharply.


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