February 22, 2025

States Should Also Reduce VAT On Petrol And Diesel

By Our Editorial Team
First publised on 2022-05-22 10:18:18

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When Finance Minister Nirmala Sitharaman announced cuts in excise duty on petrol and diesel and exhorted states to cut VAT on fuel to further reduce the burden on the common man, Congress leader and former finance minister P Chidambaram jumped the gun and said that since the excise duty collected is shared between the states and the Centre, the cut announced by the Centre would mean lower revenues for states and to expect them to cut VAT on top of that is expecting too much as states will lose revenue twice. He jumped the gun because he made this statement before studying the excise notification. The government has made the cut under the head 'Additional Excise Duty' which goes solely to the Centre and is not shared with the states. Hence, there would be no loss of revenue for states from the present cut in excise duty. The Centre is going to lose revenue to the tune of over Rs 1 lakh crore per year on account of the present cut.

Chidambaram later said that he stands corrected after seeing the exact notification. But for a seasoned politician who has been finance minister, it was not proper on his part to make an adverse comment without studying the exact notification or reading between the lines when it was said that the Centre would lose Rs 1 lakh crore after the cut. Coming from someone else, this could have been construed as fake news or rumour mongering. He has now said that the states are caught between "the devil and the deep sea" as if they reduce VAT on fuel, they will need to be compensated by the Centre as they have no other way to augment revenue. But that is no solution as the Centre is already going to lose huge revenue and cannot be expected to compensate the states. If the opposition ruled states cannot lower VAT (Kerala is an exception as it has already announced a cut in VAT) even after the Centre reduces excise duty, they have no right to blame the Centre for the high price of petrol and diesel and ask it to reduce excise duty again and again. 

The Centre is right in exhorting states to lower VAT. This is the second time after November 2021 that the Centre has reduced excise duty on petrol and diesel to arrest the price rise due to extraneous reasons without matching cuts from some opposition-ruled states. The global price of Brent crude is still hovering around $112 per barrel with little or no sign of prices easing in the immediate future and with inflation also showing no signs of going away in a hurry, the government cannot leave the entire inflation taming exercise to the RBI and monetary policy. It has taken a big step. Now it is upon states to come forward and do their bit to further ease the burden on the common man.