Finance Minister Pranab Mukherjee has been deputed by the Centre to ask all states to lower sales tax or value added tax on auto fuels and to shift to specific rates in order to work out a combined package that can lower petrol prices by up to Rs 5 a litre.
Once states cut taxes,the Centre may match the reduction through a cut in excise duty,and with oil marketing companies almost sure to reduce petrol prices by nearly Rs 2 a litre early June,retail prices could go down by Rs 4 to 5 a litre from the recent Rs 7.50-Rs 8 hike.
Petroleum Minister S Jaipal Reddy had hinted at this combined relief package at a press conference on Friday. Government (central) and state governments will together arrive at some formula, he said.
The letter that Mukherjee will send out to chief ministers this week says: It would be a progressive step if sales tax/VAT levied by your state is reduced and also made into a specific amount per litre instead of on ad valorem basis. Charging a specific tax or levy would prevent any cascading impact on the retail price of petroleum products.
The letter cites a similar sacrifice by the Centre,pointing out that it has already done away with the ad valorem component of excise duty on petrol and diesel and has made it specific.
Budget 2008-09 had abolished the 6 per cent excise duty on petrol and diesel while raising the flat rate component by Rs 1.35 a litre. Existing duty structure is a flat Rs 14.35 per litre on petrol and Rs 4.65 on diesel besides a 3 per cent education cess.
Any increase in ex-refinery prices by oil companies has a cumulative effect on retail rate paid by consumers due to the ad valorem nature of the state sales tax. Ad valorem rates,as a percentage of the price,add on and exert an upward pressure on domestic prices.
Central and state taxes,taken together,constitute almost 40 per cent of the retail price of petrol. Andhra Pradesh,to which Reddy belongs,levies the highest sales tax of 33 per cent on petrol in the country,followed by Assam and Punjab at 28 per cent.
Mukherjees letter exhorts the states to emulate the Centres June 2011 duty reduction. While the Central government has taken steps to minimise the impact of rising petro product prices on the common man,similar efforts are required from the states, the letter says.