With the Finance Ministry ruling out any reduction in Central excise duties on petrol and diesel and also indicating that bringing them under Goods and Services Tax (GST) may not be feasible, it is now left to the States to ease the pricing pressure on consumers.

“Our ability to give relief depends upon our strength (of revenue collection),” a top Finance Ministry official said. He explained that once tax revenue from direct taxes (income tax) and non-oil indirect taxes go up, there will be a possibility of cutting taxes on oil.

“Our aim should be to raise non-oil tax to GDP ratio by 1.5 per cent in the next 5-6 years,” he said, adding such a trend will lower the dependence on tax revenue from oil.

“A cut in oil taxes will add to the fiscal deficit. National fiscal deficit determines bond yield and with a higher fiscal deficit, the rupee becomes shakier,” the official said adding “then (as a result of cut in taxes) you have to make budget cuts in developmental expenditure. This is the real consequence of oil tax cut.”

The official also said the government cannot cut defence expenditure or expenditure on salary or on debt servicing as it will mean a cut on development expenditure. The official also said the government has not resorted to cutting development expenditure in order to achieve fiscal deficit target.

The countries which are tax compliant and earning more from non-oil have lower taxes on oil, he said in response to the criticism that many developing countries, specifically neighbouring countries, sell petrol-diesel cheaper than India. In fact, some of them import petrol-diesel from India. Export items do not carry taxes levied in the domestic market which make them cheaper.

Petrol and diesel are among the five petroleum products besides crude oil, natural gas, and jet fuel, which are still under the old tax regime of excise duty (to be collected by the Centre) and Sales Tax (to be collected by States).

Higher sales tax

The official said that whenever there is price rise, the Centre does not earn extra, but the States get more. First, base for calculating sales goes up which means higher collection and second, States also get 42 per cent of what the Centre earns. Despite this, many States such as Kerala, Bihar and Punjab have virtually no elbow to cut the rates, he said adding “States which supported Bharat Bandh on Monday have very high sales tax rate.”

On demand for bringing petrol-diesel under GST, the official said there is a concept of Revenue Neutral Rate (RNR). It means GST will be levied at a rate which is close to the sum of Central and States’ levies during pre-GST regime so that no one loses revenue. A breakup of retail price on Monday shows that total of Central and Excise levies on petrol was nearly 91 per cent of prices charged to dealer while it was nearly 59 per cent in the case of diesel.

“How can such rate be imposed in the case of GST,” the official asked indicating that petrol-diesel might not be brought under GST for the time being.

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