Petro goods will be freed from VAT till '05

NEW DELHI: Major petroleum products like petrol, diesel, LPG and Kerosene will be excluded from the value added tax (VAT) for the first two years. Finance minister Jaswant Singh, in his budget tomorrow, is expected to indicate the broad guidelines that states have agreed to for implementing VAT.
The new tax regime which has been under consideration for a long time may come into force from April 1. After discussions with state representatives, this new structure has been evolved to streamline the tax structure and cut out multiplicity and cascading of taxes.
Petroleum products contributes the bulk of revenues both for the state and the Centre. While customs and excise collections from petroleum itself comprise one third (Rs 1,35,000 crore) of the total revenue collected, sales taxes on these products is about 25% of the total state revenues. Officials said that this category will be dealt with separately and will be given a special status. For the first phase which is the first two years, VAT will apply to a host of other goods. Later on the same taxes will apply to petroleum products also.
While the states have not been too willing to give up revenues on petroleum products, the Centre too has its own constrains about including these products in the first phase.
Officials said that the revenue shortfall due to VAT will be partially compensated by the Centre initially. Hence the Centre has decided to postpone a decision on petroleum products. It is estimated that the burden on the Centre would be close to Rs 3,500 crore.
Under the present tax regime, multiple taxes apply to petroleum products. Taxes are levied at central, state and local levels. The tax regime in Maharashtra is a case in point. While Bharat Petroleum has a refinery in Mumbai, Indian Oil which also markets in Mumbai has to source its products from BPCL or HPCL. So, in the first stage, BPCL pays an entry tax for the crude that is brought in. When IOC buys BPCL products, it pays a state tax. Then it pays a tax again when it moves the product to another state.
Under the new VAT regime, the taxes paid at one point will be set off against the earlier tax paid thus doing away with the multiple tax regime.