Faceoff over taxes on petrol & diesel

There is sufficient reason to believe that Maharashtra deliberately avoided registering its presence during the GST Council meeting, organized in Lucknow on Friday. Reports appeared in a section of the media speculated that the Centre might move a proposal to bring petrol and diesel in GST. Certainly, this could have come as a shocker to some of the state governments, especially the non-BJP ruled states since this has been a major source of revenue income for them.

If ever such a move takes place the state governments will be at the mercy of the center for their shares from the central pool. States like Maharashtra collect huge revenue by levying state taxes on the sale of petrol, diesel, and liquor. 

Dy CM Ajit Pawar skipped the meeting

Probably this was the reason behind Deputy Chief Minister Ajit Pawar’s decision to skip the meeting. Pawar, who is in charge of the state finance department, cited some important meetings scheduled in Mumbai and the reason for the Covid19 as an excuse. Known for his forthrightness and frankness, the absence of Pawar was probably to avoid any controversy. Thankfully, the meeting did not decide on petrol-diesel and postponed it for a while.

BJP’s political ploy

But the state BJP leaders wanted this decision to appear to witness the Maha Vikas Aghadi (MVA) government’s political tightrope walk on the economic front. Currently, Maharashtra levies huge taxes on petrol and diesel and the sale of liquor. The state has been able to mop up more than Rs 40,000 Cr per annum in the last few years. The share of petrol and diesel of which has been around Rs 24,000 to 25,000 Cr every year for the last three years. This point is very important.

The state government is set to lose its rightful source of income if petrol and diesel were ever brought under GST. In that scenario, it would come as a severe blow at a time when the state economy is doomed thanks to the outbreak of the Coronavirus. The BJP, however, thinks that prices of petrol and diesel will substantially come down, at least by Rs 25, if brought under GST. Certainly, this could come as a great relief to the common man today. But on the other side, the MVA will find it difficult to run the government and the ongoing development projects will suffer. 

State banks on taxes on petrol-diesel

A question may arise as to why the BJP-led government in Maharashtra did not press for a similar demand when it was in power and got it approved by the Narendra Modi-led government at the Centre. Keep it aside for a while, even if the BJP-led union government decides to slash central taxes and cess to bring the prices of petroleum products under control, the revenue income of the state will come down automatically. Because the state tax is levied on the selling price of petrol and diesel.

State levies hefty taxes

At present, the state government levies 26 percent VAT (value-added tax) on petrol and levies a surcharge of Rs 10.12, and its application in the areas of 6-7 Municipal Corporations such as Mumbai, Thane, Navi Mumbai, Nagpur, and Amravati. The surcharge is levied to fund major infrastructure projects, such as roads, bridges, flyovers, etc. For the rest of the state, the rate of levy is 25 percent plus surcharge.

For the few select municipal corporations’ areas, the rate of VAT is 24% and Rs. 3 is the surcharge recovered through the sale of diesel. For the rest of Maharashtra, it is 21% VAT and the surcharge. Whenever the prices of petrol and diesel see a rise, the state government gets more money. If the center decides to reduce the rate of taxes, the state revenue will decline. And it was witnessed in the past as whenever the prices came down, the state resorted to increasing the rate of tax to compensate for the loss of revenue income.

State revenue is significant

Taxes on petrol, diesel, and alcohol account for a large share of the total annual revenue of the state government. In the financial year 2018-19, the state got about Rs. 43,500 Cr from this. In 2019-20, the same figure was Rs 44,000 Cr. In the year 2020-21 is estimated that the state collected Rs 35,000 Cr. In the current financial year i e 2021-22, by the end of June, the state got more than Rs 10,000 crore of which taxes on petrol-diesel account for Rs 7,500 Cr.

Given the fact, which government would prefer to give up its major source of income when other sources have seen sharp decline thanks to the lockdown necessitated due to Covid19?