Burden on States

Published : Jul 04, 2008 00:00 IST

The oil price hike burdens already strained State finances and threatens to jeopardise welfare programmes run by State governments.

THE Union governments decision to raise the prices of petroleum products has placed State governments in a quandary. While taxes on petroleum products constitute a significant proportion of a States revenue, a reduction of these taxes could undermine the States fiscal balance. However, the prospect of incurring the wrath of an electorate already burdened by a sustained inflationary spike forced many State governments to reduce taxes on petroleum products.

Among the first to do so were the governments of Delhi, West Bengal and Kerala. The governments of Tripura, Assam, Andhra Pradesh, Tamil Nadu, Bihar, Haryana, Orissa, Goa, Jharkhand, Uttarakhand and Maharashtra followed soon after. In effect, the States have taken upon themselves a portion of the burden that would have been passed on to consumers. However, some governments, such as the Bharatiya Janata Party-led ones in Karnataka and Himachal Pradesh, have dithered.

The ability of State governments to manoeuvre is far less than that of the Centre. While the Centre mobilised close to Rs.164,000 crore in taxes on petroleum products in 2007-08, it is estimated that the States of the Indian Union earned a total of Rs.62,000 crore from taxes, chiefly in the form of sales tax on petroleum products. A significant portion also came as transfers from the Centre as their share of the pool of resources from excise and customs duties collected by the Centre.

The Centre has projected a revenue loss of Rs.22,660 crore in 2008-09 on account of the abolition of customs duty on crude, the cut in customs duty on petrol, diesel and other petroleum products, and the cut in excise duty on petrol and diesel. Since the States share of Central taxes is 30.5 per cent, they stand to lose almost Rs.7,000 crore. The implication of the State governments diminished ability to manoeuvre is that they can do far less than they would like to, to protect consumers from inflation in general and from rising petroleum prices in particular.

While West Bengal reduced the sales tax on petrol and diesel by up to five percentage points, giving a relief of Rs 2.12 and Rs 1.38 a litre on the two fuels respectively, Tamil Nadu announced a two-percentage-point cut in sales tax on diesel, bringing down the rate to 21.43 per cent.

The BJP-led State governments were slow to react, despite the party headquarters directive to them to reduce taxes. Although Delhi did not cut sales tax on the two major fuels, it reduced the burden of the hike significantly in the case of liquefied petroleum gas (LPG).

Gujarat reduced the Value Added Tax on petrol and diesel by 3 per cent each, while withdrawing completely the 4 per cent VAT on LPG. Incidentally, the tax rates on petroleum products in the State were the highest in the country, barring Maharashtra, before the price hike (30 per cent VAT on petrol and 29 per cent on diesel).

The Gujarat government said the faulty policies of the United Progressive Alliance (UPA) government would result in a loss of Rs.1,450 crore to the State. The loss on account of the VAT reduction on the three products would be Rs.530 crore, apart from a notional loss of Rs.470 crore on its share of the customs and excise duties collected by the Union government. The State government said it would have to bear an additional burden of Rs.450 crore as a consumer of the two major fuels.

In Karnataka, the BJP, which focussed on inflation as a key campaign issue in the recent elections, has promised to consider cutting taxes but has postponed a decision. The State levies a sales tax of 28 per cent on petrol and 20 per cent on diesel, besides a 5-per cent entry tax on both fuels.

The States Principal Secretary, Finance, M.R. Srinivasa Murthy, said the revenue from petroleum products amounted to Rs.3,400 crore in 2007-08, constituting 20 per cent of the revenues earned from VAT and commercial taxes. The State, one of the early acceptors of the Fiscal Responsibility and Budgetary Management (FRBM) Act, takes pride in its balanced budget in the last three years. The burden of this fiscal adjustment has fallen on revenue expenditure, which includes expenditure on education, health and welfare schemes.

The BJP had also promised to increase the income limit for defining the poverty line in Karnataka, which will increase the number of families below the poverty line (BPL). The party promised to increase the limit from the current eligibility level of Rs.11,800 a year to Rs.60,000 a year. This will expand the scope of welfare programmes and will require substantially increased funding.

The unprecedented hike has brought to the fore several questions relating to the tax-mobilisation efforts of State governments. It is often assumed that State governments are merely milking heavily the cash cow that the petroleum sector is portrayed to be. However, when the issue is posed thus, it avoids several major issues relating to the tax mobilising capacity of State governments, particularly in the context of liberalisation. In particular, the element of fiscal contraction, best exemplified by the FRBM Act, closes all other options for State governments.

If there is political will, it is possible for State governments to effect an increase in fuel prices and yet provide relief to the most vulnerable. But that requires two things. First, a willingness to make the well-heeled pay more by way of taxes. Secondly, a commitment to insulate the poor and the vulnerable from the actual effects of a price increase. For instance, if State governments can provide an improved mode of public transport, it would take the sting out of any fuel price increase for most people.

The petroleum crisis illustrates the need for an imaginative solution, one that cannot be found in a mindset that is driven by fiscal fundamentalism.

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