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  3. States to forego Rs 44,000 crore from VAT reduction on fuels: ICRA

States to forego Rs 44,000 crore from VAT reduction on fuels: ICRA

12 Nov 2021 Evaluate

Rating agency ICRA in its latest report has said that the states will forego around Rs 44,000 crore of tax revenue after they reduced VAT on petrol and diesel in the remainder of the fiscal (FY22) but higher central tax devolution of Rs 60,000 crore will offset the losses. After months of calls for lowering the taxes on the fuels, the Centre on November 4, 2021 has reduced the excise duty levied on petrol and diesel. While the excise duty on per litre of petrol has been reduced by Rs 5, the same has been brought down on diesel by Rs 10. Following this, as many as 25 states and Union territories have lowered value-added tax (VAT) on these fuels.

According to the report, the FY22 revenue loss of the states from the tax cut is around Rs 44,000 crore, of which Rs 35,000 crore is by way of lower VAT and the rest indirectly. But, the states are not losing money as they are getting Rs 60,000 crore of additional revenue from the Centre as part of the higher-than-budgeted tax devolution. While the Central excise reduction leads to no direct revenue loss to the states, the reduction of VAT, which is levied on an ad valorem basis, the excise cut will lower their VAT inflows by Rs 9,000 crore.

Accordingly, rating agency said the direct revenue loss to the states and UTs from VAT cuts is around Rs 35,000 crore, taking the total revenue foregone to around Rs 44,000 crore for FY22, which is in line with the expected revenue loss of the Centre. Factoring in the impact of the excise duty cut and expectations for mobility and the economic recovery with the rising COVID-19 vaccine coverage, it forecasts the consumption of petrol and diesel to rise 14 percent and 8 percent, respectively, in FY22. However, the Central tax devolution is likely to exceed the FY22 budget estimates by a substantial Rs 60,000 crore, and the FY21 provisional actuals by a healthy Rs 1.3 lakh crore.

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