Critical finances of states impact VAT on lower fuel prices

The beleaguered TRS and TDP now governing both Telangana and Andhra Pradesh have chosen the VAT route to neutralise the impact of fuel prices drop on their revenues. The TDP which had blamed the UPA for lack of 'human face' in slapping fuel prices on common man has now resorted to imposition of VAT on the fuel prices to raise more revenues to its cash starved AP government. TDP had during the 2014 election campaign blamed the Congress and the UPA for raising fuel prices more than 29 times since 2004.

Taxes on petrol and diesel contribute more than 25 per cent of the commercial tax kitty n both the states. Fall in fuel prices could impact the demand and supply environment but definitely drained the revenues to the state governments. So it was no wonder that both governments have opted for a hike in VAT on fuel prices as they had no electoral takes round the corner.

Fuel prices in ten districts of Andhra Pradesh have been increased by Rs 4 per liter each of petrol and diesel since Thursday night. The government order said that against the Value Added Tax (VAT) of 31 per cent on petrol, the new rate would be “31% + Rs 4 per litre”. A similar formula is followed for diesel, which now attracts “22.25% (tax) + Rs 4 per litre”. The entire exercise is to raise an additional Rs 180 crore annually for the state which already had a Rs.16,500 deficit budget besides the burden of free power, loan waiver, pensions hike, power rates hike etc.

Like wise, the Telangana government has also revised the value added tax (VAT) rates on petrol and diesel. Last month, the government had added Rs 2 on every litre of petrol and diesel over and above the existing VAT of 31 per cent and 22.25 per cent respectively. In its latest orders, it removed the ‘Rs 2 per litre’ clause while raising the consolidated VAT rate to 35.20 per cent on petrol and 27 per cent on diesel.

The government of the undivided Andhra Pradesh had reduced the tax rates on petrol to 31 per cent from 33 per cent towards the end of 2013 in response to a general appeal given to states by the UPA government to reduce the high state taxes on petroleum products. It was also an election year strategy of the UPA government and the undivided AP stood number one in the country in terms of high tax rates on fuels and liquor.

The fall in fuel prices made matters difficult for both the governments of Telangana and Andhra Pradesh as they were already struggling to implement the costly electoral promises like farm loan waiver, free power to agriculture, incentives to industry, heavily subsidized housing, education and healthcare for the weaker section and lower middle class voters. On top, they have to promote huge infrastructural projects to support their development agenda and also remain attractive to global investors and competitive to domestic industry.