File picture of a petrol bunk in Bengaluru
Bengaluru: Pressure is mounting on the state govt to reduce VAT on petrol and diesel as fuel prices continue to rise, but the Siddaramaiah administration is unlikely to provide immediate relief citing mounting financial pressures and dependence on fuel taxes for revenue.Karnataka levies 29.84% sales tax on petrol and 21.17% on diesel, Petroleum Planning and Analysis Cell (PPAC) data shows. The recent revision in fuel taxes is projected to generate an additional Rs 3,000-4,000 crore annually for the state exchequer.The state follows an ad valorem taxation system where VAT is charged as a percentage of the base fuel price, which includes dealer price and central excise duty. As fuel prices rise, state revenues automatically increase. However, retail prices in Karnataka are lower compared to several other states.Telangana, for instance, imposes the highest VAT at 35.2% on petrol and 27% on diesel. Kerala levies over 30% sales tax along with cess and surcharge components, while Tamil Nadu uses a hybrid structure combining 13% VAT with a fixed per-litre levy.Despite criticism from opposition parties, finance department officials said a reduction is unlikely as the state is already grappling with declining revenues and the annual Rs 51,000 crore burden of guarantee schemes. They said tax on fuel and liquor remains among the biggest revenue sources for states apart from GST compensation and tax devolution from the Centre.Political analyst Sandeep Shastri said: “The state already faces a financial crunch. Also, the state govt would like people to believe that the burden of responsibility for such relief lies with the central govt.”The issue has now emerged as a political flashpoint. Opposition leader R Ashoka of BJP recently urged the state govt to reduce VAT, arguing that middle-class families and farmers were bearing the brunt of rising prices.Former Infosys CFO Mohandas Pai also accused the govt of benefiting from the hike while blaming the Centre. “At least reduce VAT on the Rs 7.5 increase and carry on your political protest,” Pai said. “Getting more money from this increase and then protesting smacks of hypocrisy.”PPAC data shows many states are shifting to hybrid taxation models that combine percentage-based VAT with fixed cess to protect revenues from crude oil volatility. Besides Tamil Nadu, Andhra Pradesh, Maharashtra and Punjab have adopted such structures.Some members of the state dealers’ association have urged the Centre to direct states to temporarily cap VAT at 5% for three to six months to cushion consumers from further shocks.
