A war of words has broken out between the Centre and the States regarding the Centre’s excise duty cut and its impact on the tax revenue of the States. On May 21, the Centre announced a reduction of ₹8/litre in the excise duty charged on petrol. A day later, Tamil Nadu Finance Minister Dr. P. Thiaga Rajan tweeted that Tamil Nadu loses revenue when the Centre cuts tax as the State’s taxes are advalorem. Ad-valorem basis means that a State’s sales tax is based on the sum of the Centre’s excise duty, the base price of petrol and the dealer’s commission. The same day, Ms. Sitharaman explained in a series of tweets that the “entire burden of these two duty cuts is borne by the Centre” and the basic excise duty which is shareable with the States “has not been touched.” Data show that a drop in the Centre’s excise duty, regardless of the component deducted, reduces the States’ VAT collections.
Change in excise duty
The table lists the components of the Centre’s excise duty on petrol before and after the cut announced last Saturday. The reduction of ₹8/litre on petrol announced by Finance Minister Nirmala Sitharaman was deducted entirely from the Road and Infrastructure Cess component which is not shareable with the States. Only the basic excise duty worth ₹1.4/litre is shareable with the States; the additional duty and cesses are not shareable.
