‘Increase in excise duty has upset the equilibrium’

Kerala Finance Minister T.M. Thomas Isaac.

Excerpts from an interview with Kerala Finance Minister T.M. Thomas Isaac :

How do the State governments see the trend of very high increase in the price of petroleum products?

On the one hand, this hike is resulting in an escalation of State government expenditures. And there is increasing pressure on State governments to bring down VAT [value added tax] to a revenue neutral position at least. So, on the one hand, the burden of increasing expenditure will be on the State government, but there will not be a commensurate increase in State government revenue. This is going to have an adverse effect on the budgets of the State governments.

Many suggestions are being made for bringing down fuel prices. One is that the Central government reduce excise duty. Two, that the State governments reduce VAT. And three, petroleum products should be included in the goods and services tax framework. Which of these will be a prudent solution?

No State government has increased VAT. So, there is no merit in asking for VAT to be reduced. In fact, it was the excise duty that was raised, to a record level: 120 per cent for petrol and 380 per cent for diesel. Therefore, it is these hikes that have to be rolled back. Some people are saying: why don’t you include petroleum products in GST? This simply is a ploy to postpone the rollback in excise hike. For, except for a passing mention, the GST council has never discussed this issue seriously. The reason is that if it is brought under the GST, the existing VAT would have to be reduced drastically and the States would have to be compensated. The States’ present compensation cess would be totally inadequate. We will need to put in place additional cess to compensate this. And this will require negotiations. That is going to take time. Let us say, at a time when crude oil prices were falling, the Centre raised the excise duty, saying it is not going to affect the consumer because the price level would be maintained. Should not the reverse take place now? Crude oil prices are rising and so they should reduce the taxes. That is the logical course. That is the solution to the problem.

There is an argument for raising the excise duty and keeping it that way, claiming it is needed for development and social sector spending. This is what the States also say with regard to VAT revenue.

There is no correlation between the increase in petroleum tax revenues and the social expenditure of the Government of India. It [higher petroleum tax revenue] is used for many other things, including recapitalising the banks, and so on. The Government of India is reluctant because if the excise duty comes down, or is brought down to the 2014 level, they would lose more than Rs.1 lakh crore in revenue, which is going to inflate the fiscal deficit. They dare not do it, given the pressures on the Indian rupee. India’s rating may go down and it may result in a run on the rupee. So, they want to maintain the fiscal deficit [at the existing level] at any cost. That is what is constraining them. But the high petroleum prices are having an adverse impact on development, particularly in the unorganised sector, on small-scale industries and so on, contributing to increases in the prices, because of the increasing cost of transportation.

Consequently, it is putting a heavy burden on the people. It has now become a major political issue; I would say, the most important political issue today. There is not much meaning in claiming that it is needed for development. The Central government has other options. State governments have no option: either you get this money or you don’t do it because you cannot borrow, you don’t have any other taxation power, and whatever money is given by the Centre is strictly as per the Finance Commission’s prescriptions. So, there is no option for State governments.

The question is, is the tax on petroleum high? Petroleum is relatively inelastic in demand and all over the world there is high tax on petrol. Not just in India. It may be argued, in India it is relatively much higher than most other countries. But I would say it is a level which people in India are used to. What has upset the equilibrium is this unparalleled increase in excise duty made by the Central government. The earlier level could have been maintained; people had accepted that level for so many decades. But the Centre has increased the excise duty rate in an unprecedented way and triggered an excessive increase in the price. So, it is the Centre that has to take action.

Some States have reduced the VAT rates. It is claimed that the States are getting a huge share of the increased excise duty.

Kerala has reduced VAT. It is true that there is an argument that the States are the major beneficiaries of increases in the prices of petroleum products. Now, almost the entire increase in excise duty has been through [the increase in] additional special duty. It is not part of the basic excise duty. Only basic excise duty is shareable with the States, under Finance Commission norms. As per the existing duty structure, 72.97 per cent and 39.58 per cent [for petrol and diesel respectively] of Central excise duty is outside the divisible pool of taxes that can be shared with the States. The Government of India has actually been denying the States their share, by increasing not the basic excise duty, but the non-shareable special or additional excise duty. But when the price of petrol rises, since the State VAT is ad valorem , the States also stand to gain. They get the tax on the additional rise in price. But what we are saying is, let the Government of India reduce the price. We will lose that ad valorem benefit. We are happy with that.

Nobody is demanding otherwise. In fact, otherwise we will have to move to a situation where States will have to go on tweaking the price to keep revenue neutral. Whenever the price is rising, we will have to reduce the State rates and whenever the price is falling, we will have to increase the rates. I don’t think that is a bright idea. Therefore, let the Government of India roll back the hiked excise duty.