Fuel tax: Goose that lays golden eggs

MUMBAI: Petrol and diesel are probably among the most politicised of commodities in the country today. Even as Union petroleum minister Murli Deora’s intervention ended the petrol pump dealers’ strike in Mumbai on Tuesday, the Maharashtra government says a lobby of northern states is responsible for the high fuel prices, due to their opposition to uniform taxation of fuel.

In Maharashtra, the dealers were on strike for two days demanding a reduction in sales tax on transport fuel. The state impose a 33% sales tax on diesel, the highest in the country. The agitation came to an end after Mr Deora assured them to take up the issue with the state government.

Incidentally, almost all Union oil ministers had been making this promise to agitating consumers and dealers now and then. This, despite the fact that sales tax is a state subject and there is little scope for central intervention. Mr Deora’s predecessors Ram Naik and Mani Shankar Aiyer had also promised to look into the high rates of taxation.

However, they were not very successful in making changes in central taxation nor did their efforts make any difference to taxes at the state level. When a Union minister ‘advises’ a state to bring down the sales tax on fuels, the state reacts by asking, “Why not do it at the Centre?”

“We are willing to cap sales tax on petrol-diesel at 20% provided the Centre brings these commodities under VAT,” a top finance department official told ET. The state government, in fact, had submitted a proposal to the central government in this regard.

The Centre, on the other hand, is helpless since the northern states, especially Punjab, Haryana and Delhi have opposed uniform taxation fearing political backlash. Tax on diesel is a politically sensitive issue in northern states because of its use as fuel for tractors. Diesel is taxed at 8.8% in Punjab and at 12.5% in Delhi.

These states find it difficult to raise the tax rates to 20%. “If brought under VAT, the price of diesel will go up in those states which in turn will hit the politically strong farmers’ lobby,” the official said.

According to him, it’s a north-south divide. The tax on petrol and diesel ranges between 28% and 33% in southern states vis-a-vis 8-12% in northern states. “In such a situation only the Centre can hammer out a solution by bringing uniform taxation. Mere advice to states won’t help,” he said reacting to Mr Deora’s suggestion.

The state made it clear that it is not in a position to offer major tax sops since the tax on fuel contributes one fourth of the state’s total sales tax revenue. According to the finance department’s cash flow statement for ’05-06, the Maharashtra government pocketed Rs 5,460 crore as sales tax on motor spirits and lubricants in the last fiscal.

The total sales tax revenue for the year was Rs 22,128 crore. For the current year the figure is expected to cross Rs 6,000 crore revenue for the state. “We can’t afford yet another concession,” a finance ministry official said referring to a cut announced in June last. On June 14 the state slashed sales tax on petrol and diesel, by 80 paise and 30 paise, respectively.

The sales tax on petrol in Mumbai, Thane and Navi Mumbai was reduced from 30% plus a one rupee surcharge to 28% plus the one rupee surcharge, while that on diesel was cut to 33% plus one rupee surcharge from 34% plus one rupee. For the rest of Maharashtra, sales tax on petrol was cut from 29% plus one rupee to 27% plus one rupee, while that on diesel was reduced from 31% plus one rupee to 30% plus one rupee.