The Congress-led government, which is under pressure on rising inflation and an increase in fuel prices, has swung into damage control.
Taking a cue from the petroleum ministry, at least two Congress-ruled states--Delhi and Goa--have decided to lower state levies on petroleum products.
The Delhi government rolled back the hike in value added tax (Vat) on diesel, bringing down the consumer price by Rs 2.50 a litre. In the process, it has reversed the decision it had taken in April to increase Vat. Following the reduction in the levy, the price of diesel will be Rs 37.60 with effect from July 20, lower than the Rs 38.10 that prevailed before the recent increase of June 25.
Similarly, the Goa Cabinet also approved a partial roll back of Vat that would reduce prices of a cooking gas cylinder by Rs 15, petrol by 88 paise and diesel by 70 paise. A few years ago, the Manmohan Singh government had impressed upon Congress-ruled states to lower the impact of an increase in petrol and diesel prices by reducing state levies.
The decision by Delhi and Goa comes ahead of the monsoon session of Parliament that is due to start on July 26. The Opposition parties have mounted an offensive against the government over inflation and its decision to free the retail price of petrol and diesel. Inflation based on the wholesale price index touched 10.55 per cent in June, while food inflation is close to 13 per cent.
Inflation based on the wholesale price index (WPI) is expected to further go up by at least 1 percentage point in July, when the impact of the retail selling prices is captured for the full month. Fuel has a 14 per cent weight in WPI.
Chief Economic Advisor Kaushik Basu told reporters that inflation in July would be higher. "The immediate term upward pressure on prices that we are expecting from the petroleum decontrol has already partly registered in the June inflation figure. We will see some more of this in the July figure," Basu told a press conference convened to give the government's perspective on price rise. These briefings are likely to be a monthly feature now.
On the specific issue of the Centre asking states to reduce tax and how it will make any impact on the overall fiscal health of the country since states will be losing revenue too, the chief economic advisor said the issue of taxation on petroleum products would need to be reviewed. He cited the Kirit Parikh report. It had observed that changes in the taxation structure would need to be examined at the time of roll out of the goods and services tax, slated for next April.
The Opposition, which had organised a successful bandh on July 5, is planning another one supported by Congress' own trade union INTUC on September 7 to protest against the price hike, among other things.
With the Congress state governments showing the way, states ruled by the Bharatiya Janata Party and the Left would now be under pressure to do the same. The West Bengal government has, however, ruled out any reduction in tax rates to offset the impact of the increase in fuel prices. After the recent hike in retail prices, Bengal industry minister Nirupam Sen had said, "We had done it (cut in tax) earlier. We have not decided anything this time." Biman Bose, the Left Front chairman in the state who is regularly firing salvoes at the Centre over price rise also remained non-commital. "It is a matter of the government. The party has nothing to do with it," he said recently in Delhi.
Congress-ruled Andhra Pradesh imposes the highest VAT of 33 per cent on petrol, while the CPM-led Kerala government imposes the highest VAT of 24.7 per cent on diesel.
Today, while welcoming the Delhi government decision, petroleum minister Murli Deora cited the example of Bihar, which levies 12.5 per cent tax on kerosene sold through the public distribution system. The Centre does not levy any tax on kerosene. "It is, therefore, in the interest of the consumers of the respective states that they reduce the sales tax collected on petrol, diesel and kerosene," Deora said, while making a case for reduction in state taxes.
Prior to the price hike, Deora had written to all state governments asking them to switch over to an ad-valorem duty structure for petroleum products. An ad-valorem rate means a cascading impact when oil prices are high since the taxation on the products is higher, rendering the product even more expensive.
Though the Centre had done away with the ad-valorem component on excise duty on auto fuels completely when the international petroleum prices peaked, it increased the specific duty on petrol and diesel by Re 1, imposed a 5 per cent customs duty on crude oil and 5 percentage increase in customs duty on petroleum products except LPG and kerosene in the last Budget even at the risk of cut motions in Parliament. The excise duty on petrol and diesel is Rs 14.78 and Rs 4.74 a litre, respectively.
Goa Chief Minister Digamber Kamat in today's statement said the state would have to bear a liability of Rs 41 crore due to VAT reduction. It has abolished VAT on LPG and reduced VAT on petrol and diesel by 2 per cent to 20 per cent on petrol and 19 per cent on diesel.
The announcements from Goa and Delhi governments came more than a fortnight after the Union government-controlled oil marketing companies increased prices of auto and cooking fuels on July 26. It also coincided with Basu conducting a second monthly media briefing on the inflation numbers and saying that the food index was at the same level as November 2009.