States to forego Rs 44,000 cr from VAT reduction on fuels

The states will forego around Rs 44,000 crore of tax revenue after they reduced VAT on petrol and diesel in the reminder of the fiscal but higher central tax devolution of Rs 60,000 crore will offset the losses, according to a report.

After months of calls for lowering the taxes on the fuels, the Centre on November 4 cut excise duty on diesel by Rs 10 a litre and by Rs 5 on petrol.

Following this, as many as 25 states and Union territories have lowered value-added tax (VAT) on these fuels.

The FY22 revenue loss of the states from tax cut is around Rs 44,000 crore, of which Rs 35,000 crore is by way of lower VAT and the rest indirectly, Aditi Nayar, chief economist at rating agency ICRA, told reporters on Thursday.

But, the states are not actually 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, she said.

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, Nayar said.

She added that accordingly, 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, she forecasts the consumption of petrol and diesel to rise 14 per cent and 8 per cent, 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.

Despite this, tax devolution to the states was unchanged at Rs 2.6 lakh crore in H1FY21 and H1FY22.

In monthly terms, the devolution amount rose to Rs 47,500 crore each in July-September 2021, from Rs 39,200 crore each in the previous three months.

Based on the expected upward revision in tax devolution to the tune of Rs 7.3 lakh crore in FY22, up from the budgeted Rs 6.7 lakh crore, the retention of the monthly amount of tax devolution is Rs 47,500 crore in October-February FY22, and Rs 2.3 lakh crore to be back-ended to March 2022, Nayar said.