May 25, 2022
Good morning. In today’s either/view, we discuss whether states should reduce the VAT for fuel, after the recent reduction in central excise duties. We also look at the robust potato business in Gujarat, among other news.
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📰 FEATURE STORY
Fuel Tax Cut – Do States Need To Follow Suit?
Over the past several years, disputes between the Central government and states have become commonplace. There’s all this talk of cooperative federalism and how much power states have in the face of a BJP-ruled Centre. In the latest episode of this saga comes something that affects the common man – fuel prices.
The Centre recently announced a reduction in the central excise duties for petrol and diesel; part of a slew of measures to control inflation. With this cut, Finance Minister Nirmala Sitharaman requested states to follow through and cut their state taxes on fuel. Some states are reluctant, citing a loss in revenues.
Ever since the Russian invasion of Ukraine began, there have been a host of economic concerns worldwide. Among them are supply shortages of essential goods and the price of fuel. Before we talk about India, let’s look at this broadly.
In general, oil prices are influenced by the global economic outlook. Geopolitical tensions can change supply and demand. Oil accounts for almost 3% of the world’s GDP as it’s one of the most important commodities. As the pandemic hit, oil demand plunged as economic activities were curtailed. Once economies started to open up, oil prices rebounded.
Speaking of geopolitical tensions, in February, Russia decided to invade Ukraine. Just a few weeks prior, oil prices were nearing $100. In the weeks following the invasion, governments across the world began imposing sanctions on Russia. The country has a lot of oil reserves, and Europe, for example, is heavily dependent on it for energy. The war began disrupting global supply chains, especially that of crude oil.
Back home in India, the price of petrol and diesel continued to increase week by week over the past few months. The Indian government cited the war for the rising prices. For 2020-21, more than 80% of India’s petroleum demand was met with imports. Over the past decade-plus, India has diversified its oil imports, i.e., importing from more countries. In 2006-07, India imported oil from 27 countries. In 2020-21, it was imported from 42 countries.
So how are fuel prices calculated in India? They’re decided by oil marketing companies. They aren’t regulated by the government anymore, so they’re responsible for adjusting prices according to global rates. Fuel attracts a high Value Added Tax (VAT). Fuel prices vary from state to state. This is because each state sets its own VAT on fuel.
Like any tax, those on fuel are a source of revenue to bridge budgetary gaps. After the first wave of the pandemic, states and Union Territories raised duties on petrol and diesel to mobilise revenue. Last November, the Centre cut duty on fuel by ₹5 per litre. Following this, some states did the same while others didn’t. Interestingly, most of the BJP-ruled states were the ones that followed the Centre’s lead. Now we’re in for a possible deja vu as some states aren’t budging.
VIEW: Necessary to ease inflationary pressures
Not only states but the Centre is also dependent on fuel taxes for a big chunk of its revenue. Per data from the Petroleum Planning & Analysis Cell, the fuel sector’s contribution to the Centre’s wallet was ₹4.55 lakh crores in 2020-21. So, a cut in duties affects its revenue-generating capabilities. The government took the right first step in lowering excise duties.
The danger in states refusing to follow through is playing politics with inflation. The combined impact of tax cuts will provide much-needed relief to households and their budgets. It will also help small businesses. Given the current economic circumstances, fiscal policy at the central and state level is relatively tight. It’s understandable. However, a rise in inflation has helped in buoyant tax collections. Also, nominal GDP growth is more than the interest on government borrowings.
During the Monetary Policy Committee’s (MPC) meeting earlier this month, a member stated that both central and state taxes are buoyant, giving them space to cut fuel taxes. The war in Ukraine shows no immediate signs of stopping, only adding to continued economic uncertainty. This includes global energy and food costs. In such a volatile environment, it’s best if governments give consumers a little breathing room. A state’s best way to safeguard its revenue interests is to ensure that overall economic growth is sustained.
COUNTERVIEW: State revenues vital for development
For the talk of making this issue political, it was Prime Minister Narendra Modi who stoked the fires when he blamed non-BJP states for not cutting fuel taxes. Once he spoke, responses from the opposition and state finance ministers followed. Tamil Nadu finance minister Palanivel Thiaga Rajan said the state can’t afford to cut taxes anymore. He cited the August 2021 VAT cut by the state government. It resulted in a loss of more than ₹1,000 crores for the state.
Since the BJP came to power, the Centre’s levies on petrol have increased. This led to an increase in revenues for the Central government. This hasn’t happened for the states because the Centre increased the cess and surcharge on fuel while reducing the basic excise duty that’s shareable with states. The numbers prove it. For 2020-21, the Centre’s revenue from levies on fuel was more than ₹3.8 lakh crores. However, the Tamil Nadu government, for example, got only ₹837.75 crores.
The level to which the Centre has cut taxes isn’t enough as states were already losing revenues. Combined with an inadequate sharing arrangement with states, the losses will only compound. For example, West Bengal Chief Minister Mamata Banerjee said her state’s loss is higher than other opposition-ruled states. Also, the pandemic had a devastating impact on the revenues of states. Asking them to do something that would lead to losses will only make things worse.
What’s your opinion on this?
(Only subscribers can participate in polls)
a) States can and should reduce the Value Added Tax on fuel.
b) States cannot reduce the Value Added Tax on fuel.
🕵️ BEYOND ECHO CHAMBERS
For the Right:
Why BJP, For Its Own Sake, Should Stop Temple Disputes
For the Left:
Sita Ram Goel Vindicated As ‘Eminent Historians’ No Longer Deny Islamic Iconoclasm
🇮🇳 STATE OF THE STATES
Arrears to government staff (Punjab) – More than 24,000 employees will get arrears due to them of more than five and a half years. Per orders from the Finance Department, the Administration will pay them based on the revised pay rules of the 6th Punjab Pay Commission for the period January 1, 2016, to September 30, 2021. Group A employees will get between ₹5-7 lakh. It will put an additional ₹350-400 crore burden on the Administration.
Why it matters: Last August, the Punjab government announced an increase in the basic pay of its employees by a minimum of 15%. The state accepted the 6th Pay Commission’s recommendations with effect from July 2021. It cost the government an additional ₹1,500 crores. Of the more than 24,000 employees, 971 are on deputation under different categories.
Barring outsiders from tribal areas (Kerala) – Activists are upset about a new government order that bars outsiders from entering tribal settlements without permission. K Radhakrishnan, Minister for the Welfare of the Scheduled Castes and Scheduled Tribes, said the decision was made to protect the tribal population from being influenced by Maoists. The order states that surveys, research, and videography are prohibited without prior approval.
Why it matters: Activists say the move could harm tribes more than help them. They say it’s a way for the government to keep a lid on their problems. One tribal leader said activists and media persons are the ones who listen to their issues. Labelling any outsider as a Maoist could have human rights ramifications as well.
Road safety audit (Odisha) – The Ministry of Road Transport and Highways (MoRTH) has asked Delhi Integrated Multi-Modal Transit System (DIMTS) Ltd and a research panel of IIT Delhi to carry out an audit of roads in the state. The team will travel to different parts of the state and gather road safety-related data. They’ll visit Bhubaneswar, Cuttack, Behrampur, and Rourkela. These cities have reported a high number of road fatalities.
Why it matters: The Supreme Court Committee on Road Safety (SCCoRS) directed the audit team to carry out the assessment in three states, including Odisha. There has been a steady increase in the number of road accidents and fatalities in the state. In 2014 it was 3,931. In 2021, it was more than 5,000, representing a 29% increase. Among the issues to be addressed is the violations of the Motor Vehicles Act.
Potato production (Gujarat) – Potatoes from the state are going places in the wake of the inauguration of a new potato processing plant last month. Homegrown dairy company Amul has also started exporting potato snacks to the US and Canada. The state has become a leader in exporting potatoes. The state has the proper climate for cultivating varieties of potatoes. Three big companies – HyFun Foods, McCain Foods, and Iscon Balaji Foods – are based in Gujarat. They’ve made investments worth at least ₹1,000 crores.
Why it matters: The state harvests about 7.5% of the country’s potatoes. There are a few companies that are looking to expand and add capacity in the state. World over, the Santana and Frysona are the two most common potato varieties used to make french fries. The Banaskantha region is the highest producer of the Santana variety. India used to import 6,000 metric tonnes in 2007. In 2019, it exported around 30,000 metric tonnes of frozen potatoes.
Gambling only for tourists (Meghalaya) – The state government will make legalised gambling and betting available to only tourists and not locals. The decision comes as organisations voiced their concerns about legalised betting and gambling having a detrimental effect on youngsters and their families. The government will issue licenses to operate games of skill and chance for both online and offline varieties.
Why it matters: Meghalaya became the third state in the northeast to legalise gambling and betting after Sikkim and Nagaland. For the government, it’s a way to increase their tax revenues and create new job opportunities. In 2012, Goa adopted legislation that banned locals from land and water-based casinos. It came into force only in February 2020.
🔢 KEY NUMBER
₹2 lakh crores – The Maharashtra government signed FDI agreements worth ₹2 lakh crores at the ongoing World Economic Forum (WEF) at Davos. They were signed as part of the Magnetic Maharashtra 2.0 initiative.