The report said that states on an average can still cut diesel price at least by Rs 2 per litre and petrol price by Rs 3 per litre each without impairing their VAT revenue from oil. Bigger states like Maharashtra, which have a lower debt-to-GDP ratio, have significantly larger fiscal space for lowering their tax on diesel and petrol by even up to Rs 5.
According to the report, any change in excise duty by the Centre has a direct and automatic implication on the states as most of them levy VAT on diesel and petrol as a percentage of the value. The value of the fuel takes into account the base oil price, transportation charges, dealer commission and excise duty.
“So, when the excise duty is reduced by the Centre, state’s VAT revenue gets reduced automatically. Interestingly, after the excise duty cut on fuel by the Centre, the VAT cuts announced by some of the states is only by default,” SBI said in the report authored by its group chief economist Soumya Kanti Ghosh.
According to the report, Maharashtra has gained the most, followed by Gujarat and Telangana. However, fuel prices in Gujarat are much lower than Telangana and Maharashtra. The average VAT on petrol in Maharashtra, Telangana and Andhra Pradesh is around 29.6%. “Also, the state’s own tax revenue to GDP of many states including Haryana, Kerala, Maharashtra, Rajasthan, Telangana and Arunachal Pradesh is higher than 7%. We believe there is a compelling reason for these states to adjust taxes on fuel,” said the report.