NEW DELHI: State governments will lose Rs 44,000 crore on revenue loss from tax cuts on petrol and diesel for the rest of the financial year, rating agency ICRA said.
“Since most states levy VAT on an ad valorem basis, the excise cut will lower their VAT inflows by Rs 9,000 crore. Subsequently, varying VAT cuts on fuels have been announced so far by 25 states and Union Territories, and others may well follow,”Aditi Nayar, Chief Economist, ICRA Ltd said.
“We tentatively estimate the revenue loss to all states and UTs from the VAT cuts on these fuels at Rs 35,000 crore. Accordingly, their total revenue foregone is assessed at Rs 44,000 crore for FY2022, in line with the expected revenue loss of the GoI,” Nayar added.
The Centre on November 4 cut excise duty on diesel by Rs 10 a litre and by Rs 5 on petrol. Following this, as many as 25 states and Union territories have lowered value-added tax (VAT) on these fuels.
Factoring in the impact of the excise duty cut and expectations for mobility and the economic recovery with the rising Covid-19 vaccine coverage, ICRA forecasts the consumption of petrol and diesel to rise 14% and 8%, respectively, in FY22.
However, it added that the loss is smaller than their likely gains from the higher-than-budgeted tax devolution, as ICRA pegs that the Central tax devolution is likely to exceed the FY22 budget estimates by a substantial Rs 60,000 crore, and the FY21 provisional actuals by a healthy Rs 1.3 lakh crore.
Despite this, it added that the tax devolution to the states was unchanged at Rs 2.6 lakh crore in H1FY21 and H1FY22.
In monthly terms, the devolution amount rose to Rs 47,500 crore each in July-September 2021, from Rs 39,200 crore each in the previous three months.