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State govts thrive on petroleum goods tax

The heavy tax burden borne by the consumers of petroleum products is reflected in the fact that they contribute to more than 40 per cent of the Central government's excise collections and over one-third of the total revenue of state governments.

SPS Pannu | June 27, 2011 | Updated 11:01 IST

The state governments, which rake in over one-third of their revenue from sales tax on petroleum products , are being asked by the Central government to ease this levy to help consumers and oil companies cope with skyrocketing international crude prices.

However, the state governments are reluctant to let go of this lucrative source of earnings.

While petroleum minister Jaipal Reddy has already made the appeal, a formal letter is expected to be dispatched by the finance minister to the states on the issue.

The heavy tax burden borne by the consumers of petroleum products is reflected in the fact that they contribute to more than 40 per cent of the Central government's excise collections and over one-third of the total revenue of state governments.

According to the C. Rangarajan, Committee's report on pricing and taxation of petroleum products, "Sales tax collection from the oil sector have consistently been contributing to a third or more of the total tax collections of the states thereby burdening the consumers as well as building an undesirable dependence at the state level, too, for revenues on a single sector." " Moreover, the rates of taxation vary widely from a minimum of 20 per cent to a maximum of 34 per cent in the case of petrol, and from a minimum of nine per cent to a maximum of 38 per cent in the case of diesel," the report adds.

The report has made out a case for uniform policy on sales tax levies on petroleum products.

Apart from the size of the petroleum tax kitty, the ease of collection is another reason that the central and state governments have been reluctant to rationalise the tax structure on petroleum products.

Since these taxes flow into the government's coffers directly from the public sector oil companies there is no scope for leakage, which gives the governments an assured source of revenue that they would not like to let go.

Senior oil sector officials point out that the finance ministry had been needlessly dragging its feet over abolishing the customs duty on crude oil and the reduction in excise duties even though petroleum products were being sold below market prices.

The finance ministry has put in place a circuitous route where it firsts collects taxes on petroleum products from consumers and oil companies and then reimburses the subsidy after a time lag.

While the finance ministry is able to show a lower fiscal deficit for the record, the oil firms have to pay a high cost as they have to borrow at high rates of interest to keep their operations going. This, in turn, erodes their resources. The ad valorem or value-based nature of the customs and excise duties serves to make matters worse as each time the prices of crude oil and petroleum products go up the amount of taxes that have to be paid also increase.

At a time when crude prices are skyrocketing the ad valorem system acts as a double whammy to hike the crushing burden on both consumers and oil companies.

The petroleum ministry has been arguing with the finance ministry to put in place a specific tax system which depends only on the quantity of products sold instead of the value.

A senior Indian Oil Corp (IOC) official pointed out that advanced countries, such as Japan operate on such specific duty structures.

Courtesy: Mail Today 

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