States will lose earnings if they lower barrel on fuel and dieselThe states will need to take a hit of roughly Rs 44,000 crore in regards to tax income once they minimize value included tax (BARREL) on gas and diesel, for the remaining part of the current fiscal.
At the same time though, greater main tax devolution worth Rs 60,000 crore will to a large extent, offset these losses, ranking firm ICRA said.Amid widespread criticism from all quarters over spiralling fuel rates, the government on November 4 had actually reduced excise duty on fuel and diesel by Rs 5 and Rs 10 per litre respectively.After months of require lowering the taxes on the fuels, the Centre on November 4 cut excise task on diesel by Rs 10 a litre and by Rs 5 on petrol.Since then, 25 states and union territories have lowered VAT on these fuels.Revenue loss of states from tax cut is around Rs 44,000 crore for the current financial year, out of which Rs 35,000 crore is by way of lower barrel and the rest indirectly, Aditi Nayar, ICRA's primary financial expert said.She added that states are not actually losing money as they are getting Rs 60,000 crore of extra earnings from the Centre as part of the higher-than-budgeted tax devolution.While the Central excise decrease leads to no direct earnings loss to the states, the decrease of barrel, which is imposed on an ad valorem basis, the excise cut will decrease their VAT inflows by Rs 9,000 crore, Ms Nayar said.She added that accordingly, the direct earnings loss to the states from VAT cuts is around Rs 35,000 crore, taking the overall income inevitable to around Rs 44,000 crore for the existing fiscal, which remains in line with the anticipated revenue loss of the Centre.Factoring in the impact of the import tax duty cut and expectations for movement and the economic healing with the increasing COVID-19 vaccine protection, she forecasts the intake of gas and diesel to rise 14 per cent and 8 per cent, respectively, in 2021-22.