Cutting taxes easy, who's going to fund govt expenses?
Ever since chief minister Manohar Parrikar slashed VAT rates on petrol sales in Goa from 22% to just 0.1% and prices fell R11 a litre last month, going to Goa way has become a convenient political mantra. If the BJP has a problem with the government hiking petrol prices, for instance, why don’t its chief ministers lower VAT rates? Indeed, Congress states of Kerala and Uttarakhand have lowered VAT rates to lower petrol prices by around R1.6-1.7 a litre already and more are expected to follow.
Going the Goa way, however, is easier said than done and, in Parrikar’s case, the heavily tourism-dependent nature of Goa was clearly a factor since the high petrol prices have the potential to hit the state badly. So what the state lost in petrol-VAT, it hopes to make up in taxes on tourist activities. While both central and state levies account for 37% of petrol prices in Delhi (this is higher in several other states like Tamil Nadu where VAT rates are 27% as compared to Delhi’s 22%), this is around 19% in the case of diesel in Delhi. Clearly, there is a large scope for price reductions through a cut in VAT rates or even excise and customs duties.
But, when you consider how important petroleum duties are to overall central/state revenues, the picture looks quite different. For the Centre, such levies comprise between 15% and 20% of all customs duty collections and between 50% and 55% of all excise duty collections. For 2010-11, according to a Rajya Sabha answer, a total of R1,36,497 crore was collected by the Centre from the petroleum sector—that’s 17% of gross central tax collections in that year. So while political parties are egging on the government to lower taxes to reduce the burden of the petrol price hike on the common man, are they willing to see a cut of a commensurate amount in spending on MGNREGA, PDS or the Right to Education and other such social programmes? In the case of the states, where R88,997 crore was got from the sector in 2010-11, this accounted for 32% of all VAT collections in the year from different sectors—are political parties comfortable with electricity prices rising as, having gone the Goa way to slash VAT rates on petroleum products, states have little left to subsidise electricity tariffs? And yes, had the central government not allowed A Raja to gift away spectrum and it had got R60,000 crore more (to use the median estimate of the CAG for the loss caused) from proper auctions, the Centre would have been able to slash excise/customs rates by more than half!