States Face Pressure to Cut Fuel VAT as Oil Firms Still Lose Money

The increase in pump prices by around Rs 5 a litre is only a dent to under-recovery given that oil companies are still losing Rs 13 a litre on petrol and Rs 38 on diesel, without factoring in taxes, resulting in heightened pressure on the states to lower VAT, which is as high as 30% in some of the states.

While the petroleum companies are losing money, Centre has already taken a hit through a reduction in excise, while the consumer is paying more to bear a part of the burden only to leave the states to part with a share of their revenue to ensure that the oil retailers are left with sufficient funds to meet their investment requirements and stay afloat.

"The consumers live in the states; the responsibility is not just with Centre's. The burden has to be split, even if it is not equally," said an official.

While those with the lowest VAT rates impose around 20% tax, there are states which go past the 30% level as taxes are layered with per-litre additions and infrastructure cesses.

In the past NDA-governed states have responded by lowering state levies, though some of them still keep them higher than the average rates.

But those such as Tamil Nadu, Kerala and West Bengal have among the highest pump prices, thanks to state taxes.

Telangana and Kerala have the highest pump prices.

Although there have been discussions in the past on getting the two auto fuels on the GST platform, states, cutting across party lines, have resisted the transition, and they have good reason for it.

Apart from state excise on liquor, VAT on fuel is the only major source of own tax revenue for them, with registration of property and automobiles being among other prominent avenues to mop up resources.

For the states, a bulk of the resources comes through a split of GST apart from getting a 41% share of all central taxes - be it central GST, income tax or customs - but they crib about the cesses and surcharges levied by Centre which stays with it.