Is this federalism? PTR on Centre asking states to reduce taxes on fuel

The reduction in taxes that were announced by the Centre in November 2021 has caused an additional loss of about Rs. 1,050 crores in annual revenue to Tamil Nadu

Tamil Nadu Finance Minister P T R Palanivel Thiaga Rajan on Sunday questioned the rationale behind the Union Government exhorting states to follow suit by cutting their taxes on petrol and diesel when it “did not inform, let alone ask for any state’s view” while increasing the price since 2014.

Thiaga Rajan, a top banker before he took a plunge into politics in 2016, ruled out any cut in state’s taxes on petrol and diesel in Tamil Nadu, maintaining that it is “neither fair nor reasonable” to expect states to reduce their taxes.

“The Union Government didn't INFORM, let alone ASK for ANY state's view when they INCREASED Union taxes on Petrol ~23 Rs/ltr (+250%) & Diesel ~29 Rs/ltr (+900%) from 2014. Now, after rolling back ~50% of their INCREASES, they're EXHORTING States to cut. Is this Federalism?” he asked on Twitter quoting Union Finance Minister Nirmala Sitharaman’s tweet.

Announcing the reduction in prices of petrol and diesel on Saturday, Nirmala had exhorted all state governments, especially the states where reduction wasn’t done during the last round, to also implement a similar cut and give relief to the common man.

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Later, he issued a detailed statement in which he said the DMK government led by Chief Minister M K Stalin had cut Value Added Tax (VAT) on petrol by Rs 3 in August 2021 much before the Union Government reduced its taxes on fuel in November last year. The price reduction by the state has led to a loss of Rs 1,160 crore annually.

Since Tamil Nadu levies ‘ad valorem’ taxes, which are applied after Union taxes, Thiaga Rajan said, the state will lose Rs 800 crore in annual revenue due to the Union Government’s decision to reduce the taxes. Similarly, the Centre’s move to reduce taxes in November 2021, had caused an annual loss of about Rs 1,050 crore.

“This will put a huge strain on the finances of the States, that were already burdened due to the additional expenditure incurred by them for Covid relief activities,” Rajan said, adding that TN reduced taxes last year despite inheriting a precarious fiscal position from the previous Government and incurring additional expenditure to handle the Covid-19 pandemic.

The minister pointed out that the Union had never consulted the States when they increased the taxes on petrol and diesel multiple times and “exorbitant increase in taxes” by it has been only partially reduced through their cuts and the taxes continue to be high as compared to the 2014 rates.

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“Therefore, it is neither fair nor reasonable to expect states to reduce their taxes,” Rajan said, effectively ruling out a cut in levies in Tamil Nadu.
Accusing the Union Government of substantially increasing the levies on petrol in the past 7 years, Rajan complained that there has not been a matching increase in the revenue to the state, though the Union’s revenue increased manifold.

“This is because the Union Government has increased the cess and surcharge on petrol and diesel while reducing the basic excise duty that is shareable with the states,” Rajan said.
Though the Union Government has reduced the taxes, it is still higher than the 2014 rates by Rs 10.42 per litre for petrol and Rs 12.23 per litre for diesel, Rajan said, adding that there is a strong case for the Union Government to further reduce its taxes.

“It is heartening to note that the Union Government has finally heeded to the repeated requests of the Tamil Nadu Government to reduce the taxes on petrol and diesel, which were egregiously increased by the Union Government from 2014 to 2021,” Rajan said in the statement.