States to Lose 44,000 Crore Due to Fuel Tax Cut

The Central Government finally reduced excise duty on petrol by Rs 5 and diesel by Rs 10. After this announcement, about 25 states and Union Territories (UTs) have reduced the Value-added Tax (VAT) on these fuels.

As per a report, the states will lose about Rs 44,000 crore worth of tax revenue after the recent VAT reduction on diesel and petrol in the remainder of the fiscal, but a higher central tax distribution of Rs 60,000 crore will counterbalance the losses.

The states will face an FY22 revenue loss worth Rs 44,000 crore due to tax reduction, out of which Rs 35,000 crore is due to lower VAT and the rest of the loss due to other implications. However, the states will not lose money since they will be receiving Rs 60,000 crore worth additional revenue via the Centre as a part of the higher-than-anticipated tax devolution.

The central excise cut results in revenue loss directly to the states. The VAT reduction imposed on a pro-rata basis will lessen their VAT inflows by Rs 9,000 crore. The loss of direct revenue to states and UTs due to VAT reduction is about Rs 35,000 crore, considering the overall revenue missed to about Rs 44,000 crore concerning FY22, which is in accordance with the anticipated revenue loss of the Centre.

Due to the excise duty reduction, there is anticipation for increased mobility, and also, the economic recovery is improving with the increasing COVID-19 vaccine coverage. There is anticipation that in FY 22, diesel and petrol consumption will increase by 8% and 14%, respectively.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in