New Delhi: In a concerning development, the recent surge of around Rs 5 per liter in petrol and diesel prices has proved inadequate to compensate for the losses (under-recovery) faced by oil companies. Oil companies are still reportedly bearing heavy losses of Rs 13 per litre, excluding taxes, on petrol and ₹38 per litre on diesel. Owing to this situation, pressure is mounting on state governments to reduce VAT (Value Added Tax), which remains as high as 30 percent in some states.
It is important to note that while petroleum companies continue to face losses, the central government has already absorbed part of the burden by reducing excise duty. Consumers are also bearing a share of the impact. In this scenario, expectations are growing that state governments may also give up a portion of their revenue so that oil companies can retain sufficient funds to meet investment needs and remain financially sustainable in the market.
Who will get relief?
As per the Times of India report quoting officials, it is not the responsibility of the central government to control the prices. This financial burden will have to be shared by both sides, even if not equally. A reduction in VAT could provide some relief in petrol and diesel prices. At the same time, if oil companies raise fuel prices, lower VAT could shield consumers from the direct impact. The amount could also help reduce the losses of oil companies.
Here are some of the key details:
- The states with the lowest VAT, the rate is around 20 percent.
- However, in several states, VAT exceeds 30 percent because additional per-liter taxes and infrastructure cess are imposed.
- Currently, due to higher VAT rates, Telangana, Kerala, and West Bengal have some of the highest petrol and diesel prices in the country.
- Some NDA-governed states had earlier provided relief by reducing state taxes, but in a few of them, rates still remain above the average.
- The inclusion of petrol and diesel under the Goods and Services Tax (GST) framework has been discussed several times
- State governments across political parties have consistently opposed the move.
According to states, the major reasons are:
- Apart from state excise duty on alcohol, VAT on fuel is the largest and most independent source of revenue for states.
- Besides this, states mainly have property and vehicle registrations as other significant means of generating resources.
Financial tug-of-war between the Centre and states
Notably, a large part of states’ resources comes from GST revenue sharing. In addition, they receive a 41 percent share of all central taxes (such as central GST, income tax, and customs duties). Despite this, state governments often object to cesses and surcharges imposed by the central government.
The reason is that revenue from these components remains entirely with the Centre and is not shared with the states.
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