Data | Will a cut in Centre’s excise duty on petrol reduce States’ sales tax revenue?

Data show that a drop in the Centre’s excise duty, regardless of the component deducted, reduces the States’ VAT collections

A war of words has broken out between the Centre and the States regarding the Centre’s excise duty cut and its impact on the tax revenue of the States. On May 21, the Centre announced a reduction of ₹8/litre in the excise duty charged on petrol. A day later, Tamil Nadu Finance Minister Dr. P. Thiaga Rajan tweeted that Tamil Nadu loses revenue when the Centre cuts tax as the State’s taxes are advalorem. Ad-valorem basis means that a State’s sales tax is based on the sum of the Centre’s excise duty, the base price of petrol and the dealer’s commission. The same day, Ms. Sitharaman explained in a series of tweets that the “entire burden of these two duty cuts is borne by the Centre” and the basic excise duty which is shareable with the States “has not been touched.” Data show that a drop in the Centre’s excise duty, regardless of the component deducted, reduces the States’ VAT collections.

The table lists the components of the Centre’s excise duty on petrol before and after the cut announced last Saturday. The reduction of ₹8/litre on petrol announced by Finance Minister Nirmala Sitharaman was deducted entirely from the Road and Infrastructure Cess component which is not shareable with the States. Only the basic excise duty worth ₹1.4/litre is shareable with the States; the additional duty and cesses are not shareable.

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The table lists the petrol price build up in Delhi before and after the central excise duty cut on Saturday. As Delhi’s sales tax rate of 19.4% is charged on the sum of the base price, the Centre’s excise duty and the dealer’s commission, a reduction in excise duty will also bring down Delhi’s sales tax charged on a litre of petrol. In this case, due to the Centre’s cut, Delhi’s sales tax reduced by ₹0.83/litre of petrol. 

The table lists the VAT/sales tax levied by select States. Similar to Delhi, all the States charge VAT as a % on the sum of the base price, the Centre’s excise duty and dealer’s commission. In addition to that, some States also charge an additional amount as a flat rate on every litre of pertrol or as cess. So, while the Centre’s excise duty component remains fixed, the States’ VAT rate is based on the other three components. And a reduction in excise duty will impact States’ revenues to varying degrees based on the % of VAT levied.

Moreover, the Centre is expected to transfer the “unshareable” cess to the designated reserve funds so that it can be utilised for the earmarked purposes. However, in 2020, the CAG observed that the Centre retained 40% of all cess collections in FY19. Not a rupee of the ₹1.2 lakh crore of cess collected on crude oil was transferred to an oil industry development body it was meant to finance (FY10-FY19).

Source: PPAC, CAG, IOCL