Delhi government on Tuesday announced its decision to increase the Value Added Tax (VAT) on petrol and diesel to augment revenue for the state. The government announced to hike VAT to 30 percent from 27 percent that will make the fuel costlier by Rs 1.6 per litre in the state.
And on diesel VAT been hiked to 30 percent from 16.75 percent making it costlier by Rs 7.10 per litre, noting a massive increase in the maximum retail price of the fuel.
Diesel is now priced at Rs 69.39/litre and petrol at Rs 71.26/ litre in Delhi.
The government's decision comes as states across the country are struggling to meet expenditure amid the lockdown imposed due to the coronavirus outbreak.
The Delhi government, however, said that once the revenue stabilizes, it will revise this levy.
"Hike in VAT on petrol and diesel is a revenue generation exercise. The government decided to do so to meet its expenditure such as salaries etc. The government also decided to revise this levy once revenue stabilizes in the coming months," said a senior Delhi government official who did not wish to be named.
Not just Delhi, many other states have recently also resorted to hiking state levies on fuel and liquor to augment revenues.
Recently states like Haryana, Tamil Nadu, Nagaland, Assam, Meghalaya had hiked state levies on fuel.
States are struggling for finances since the revenues that the states on our majorly covered under the goods and services tax regime and only a select few items are outside the ambit of GST which leave limited scope for the states to regulate taxes on those to earn their revenues.
GST collections for the month of March, reported in April have seen a massive decline and already Centre owes a handsome amount to the states for the last financial year under the compensation dues, which Centre is unable to pay to the states. Thus, making it more difficult for States to meet their expenditures in these trying times.
Not having much scope to grapple with the current expenditure demands, states are finally are moving towards hiking levies on petroleum products, alcohol and could soon also decide to hike stamp duty rates since these are the three major areas from which states independently on revenues.
Experts also say that states are financially weak and thus are moving towards adopting such revenue generation measures.
"With GST collections at an all-time low and which is likely to be the case for the next 4-6 months, States are finding it difficult to fund the fight against COVID-19. Therefore, it becomes important that States leverage whatever limited means it has to augment revenue collections. Since the imposition of VAT on fuel and Excise on liquor still remain within the realms of State Governments, most States will seriously consider hiking both to support their finances. As far as VAT on fuel is concerned, the hike in taxes may not yield much at the moment since the usage is mostly limited to commercial vehicles as private vehicles primarily remain off the roads," says Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co.
However, Bose also says that "the States will have to be careful as any hike in fuel prices have a direct impact on inflation, which should be avoided at a time when most essential items are scarce. Apart from this, hike in Excise on liquor will definitely help in augmenting revenue for state governments as liquor sales are likely to go through the roof in the coming weeks. However, for a State like Delhi, the Excise rates in neighbouring states of UP and Haryana play a major role in fixing the rate of Excise on liquor in Delhi. In the short term, the steep hike in Excise rate should help the Delhi government to shore up revenue to fund public spending. In the long run though, once the borders are de-sealed, this move may back-fire as steep prices of alcohol may lead people to cross over the border to neighbouring States to procure alcohol at cheaper prices, leading to a revenue leakage for the State government. The State government should be cognizant of this issue and hopefully, it will roll-back the hike when the time is right."
M S Mani, Partner, Deloitte India too says that States have limited scope of revenue. “The hike in VAT rates on petroleum products indicates the urgent need for states to increase revenues in a situation where industrial activity has been almost at a standstill and GST revenues are at an all-time low. The increase in the VAT could lead to higher revenues for states once the demand for petroleum products, which is presently depressed, becomes normal once the lockdown is lifted.“
Abhishek Jain, Tax Partner, EY too feels the same and adds that "Typically for states, their own tax revenues are in major contributed through State GST (SGST), taxes on petroleum products and liquor. The lockdown has significantly impacted SGST revenues and lower oil consumption has impacted revenues from petroleum products as well. The additional fee/tax on liquor and also increase in VAT by some states on petrol and diesel should help counter some of these losses"
Explaining the rationale for Delhi, Saloni Roy, Senior Director, Deloitte India says, “Delhi Government earns the bulk of its revenue from the sale of petroleum and alcohol. Sales have been negligible during the period of lockdown which has significantly impacted revenue collections of state governments. As the lockdown was suddenly announced and thereafter extended, earnings of state Governments have been badly affected, similar to what businesses are also facing. The easing of lockdown conditions announcements made over the weekend has been viewed as a lease of life. The relaxation of the lockdown conditions and alcohol shops re-opening after 40 days, led to massive and in some cases, unruly crowds where social distancing norms were ignored. New levies that have been introduced by state governments are essential measures to make up losses they have incurred and also curb crowds at alcohol stores."