Central Excise & VAT: What the PM forgot to tell

The basic excise duty on a litre of petrol in 2012 was Rs 6.35 whereas in 2022 it is Rs 1.40! Over 95% of central excise today comprise cess and surcharge which are not shared by the Centre

Central Excise & VAT: What the PM forgot to tell
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AJ Prabal

It was unusual for even Prime Minister Narendra Modi when he made an impassioned appeal to the opposition-ruled states to reduce VAT (Value Added Tax) on fuel. It was an interaction with chief ministers on COVID. Not surprisingly the chief ministers were not allowed to speak while the PM blamed the opposition-ruled states for not reducing VAT unlike the BJP ruled states.

Reactions were swift in coming. West Bengal chief minister Mamata Banerjee took a swipe and said, “Uttar Pradesh and Gujarat can forgo Rs 4000-5000 Crore because you give them a lot more money, Rs 40,000 Crore. But you have not cleared dues amounting to Rs 97,000 Crore to West Bengal”.

Others were not too far behind. Here are some reactions:

Rahul Gandhi:

High Fuel prices - blame states

Coal shortage - blame states

Oxygen shortage - blame states

68% of all fuel taxes are taken by the Centre. Yet, the PM abdicates responsibility.

Modi’s Federalism is not cooperative. It’s coercive.

Mamata Banerjee:

It is our promise that if the Central Government clears our dues, Government of West Bengal will exempt all taxes from Petrol & Diesel for the next 5 years! ₹97,807.91 Cr is due. Narendra Modi Ji, let us see if you can deliver

Dr P Thiaga Rajan:

Though new to office, I'm pretty sure that Co-operative Federalism does NOT mean:

a) That the Union shifts taxation from Excise (shared w/ States) to Cess & Surcharge (NOT shared) or

b) That all States should ask "How Much?" when the Union says "Thou Shalt Cut"

P Chidambaram:

On the day the PM exhorted States to cut the VAT rate on petrol and diesel, the MoF announced that the Centre owes Rs 78,704 crore to the States!

The amount owed is actually more. If you add the amounts that the States claim are owed to them, the total amount may be bigger. Only the Controller of Government Accounts (CGA) can certify the correct amount. It will be interesting to know why the MoF embarrassed the PM on the day he chose to admonish the States!

Ved Nayak:

Is the PM referring to Madhya Pradesh where petrol sells at Rs 120/lt with VAT @ almost 36% and Karnataka where petrol is Rs 111 with VAT @ 32%? One never knew they're Opposition ruled!

For the PM, being economical with the truth comes naturally because what the PM failed to mention is that while the Centre did reduce central excise on fuel in November and some states did reduce VAT then, in March this year fuel prices were hiked 14 times in 16 days.

James Wilson, an independent data cruncher, decoded the fuel price hike through several charts and graphs. When the NDA Government took over in 2014, the central excise tax was Rs.9.48 (wef 14/09/22). It was steadily increased to Rs.32.98 (on 6.06.2020). On 4.11.2021, the central excise was reduced to Rs.27.90. See this chart:

There is another catch. Only Basic Excise Duty is shared with States while such duty today comprises only 5% of the total central excise duty. In 2012 the basic duty was as high as 67%.

The remaining 95% of the central excise consist of cess/surcharge imposed at the discretion of the Union Government.

What is more, 42% of the basic excise duty goes to the states. But if only 5% of the central excise happens to be BED, then BED today is approximately Rs 1.35 a litre in the central excise duty of Rs 27.90 per litre. States are expected to get 42% of this and the Centre 58%. Figure out how much of the central excise then goes to the states.

With 95% of the central excise (Rs 26.50 out of Rs 27.90) comprising cess and surcharge, which is not shared with the states, the Centre gets to corner most of the central excise duty.

While Central Excise is a specific tax, that is a fixed amount per litre of petrol, states charge their tax as either Sales Tax/VAT, where it is a percentage tax. Since it is a VAT/Sales Tax, states' tax is a percentage of the base price, central excise, freight and dealer commission.

So when Union reduces central excise, states automatically take a cut, while if the base excise duty increases, states benefit a lot more, explains Wilson. The BED in 2012 was Rs 6.35 per litre but in 2022 it is just Rs 1.40 a litre !

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