Salient features of Value Added Tax (VAT)

VAT is a simplified and transparent system of indirect tax. VAT is charged and collected at each stage of production/processing/trading with a provision of set-off of tax paid at earlier stage. It does not have any cascading effect due to availability of credit of tax paid at earlier stage. Due to this rebating system, it is easier for the assesses to pay the taxes. VAT is a multi-point tax system when compared to the earlier system of sales tax scheme, which was essentially a single point tax system. Under VAT system of tax, only one tax is charged, i.e. Value Added Tax, whereas in the earlier sales tax system, various taxes were levied in addition to sales tax, viz. turnover tax, additional tax, surcharge on sales tax, etc. which were either recoverable or irrecoverable. VAT is essentially a tax on value addition at each stage of the supply chain.

Some of the benefits associated with VAT are:

All the States, except UP and Pondicherry, have implemented VAT by replacing sales tax.

In this year's budget speech Finance Minister has announced Government's intention of putting in place Goods and Service Tax in place by the year 2010. Towards this a reduction in CST from 4% to 3% has also been announced. A comprehensive Goods and Service Taxation system will be the next logical step after VAT.

Applicability of VAT for motor fuels

The white paper on VAT in para 2.18 has recommended as follows:

"In general, ail the goods, including declared goods will be covered under VAT and will get the benefit of Input Tax Credit (ITC).

The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the Sales Tax Act or any other State Act or even by making special provision in the VAT Act itself, and with uniform floor rates decided by the Empowered Committee."

It can be seen that the goods which were intended to be kept outside VAT, as per the above, inter alia included Motor Spirit (MS), High Speed Diesel Oil (HSD) and Aviation Turbine Fuel (ATF).

The status of applicability of VAT on motor fuels, viz. petrol, diesel and ATF is as follows:

Attempts made by Central Government to bring uniformity in VAT/ Sales tax rates in different states

The VAT and other levies imposed by various State Governments are broadly categorized in two parts, i.e. recoverable and irrecoverable. The portion of such levies which are included in retail selling prices, i.e. effect of which is borne by the consumers are recoverable taxes whereas the taxes which are absorbed by oil companies without directly passing on the same to end-consumers are called irrecoverable taxes.

Most of the States have already implemented VAT on petrol and diesel. However, the rates of VAT on petrol and diesel vary from State to State.

Lack of uniform VAT rates on petrol and diesel is main cause for the high and varied retail selling prices of these products across the country. Final prices of petroleum products to the consumers include an element of State VAT tax, which in some of the states is very high. For example, the VAT on Petrol in Andhra Pradesh and Tamil Nadu is 33% and 30% respectively as against 20% in Delhi. The differential in the VAT on diesel in Madhya Pradesh and Delhi is as high as 16.25%. There is a need to substantially reduce the VAT rates and also to make them uniform across the country.

It may be emphasized that petroleum product prices have shown sustained and unprecedented increase in the international market since 2004. Movement of prices of petroleum products in international market affects the pricing of petroleum products in India.

Whenever basic prices of petroleum products are increased, the ad-valorem rates of sales taxes have a cascading effect on retail selling prices. The states need to suitably adjust the sales tax rates so as to neutralize the impact of ad-valorem sales tax levy on the consumer prices when the basic prices are increased due to abnormal increase in prices of petroleum products in international market. Further, huge variation in VAT rates has resulted in inter-state product diversions in the areas adjacent to State borders

This Ministry has been continuously following the matter with the State Governments for reduction in the rate of sales tax. Further efforts are being made to ensure that State Governments adhere to uniform floor sales tax rates for petroleum products.

It may be mentioned that to mitigate the impact of increase in international prices on retail selling prices of petroleum products, the Union Government have reduced in phases the ad valorem rate of excise duty on petrol from 32% as on 01.04.02 to the present level of 6% and on diesel from 16% as on 01.04.02 to the present level of 6%.

Recommendations of Rangarajan Committee on rationalization of sales tax/VAT

Rangarajan Committee observed in its Report that sales tax collection from oil sector has consistently been contributing to a third or more of the total sales tax collections of the states, thereby burdening the consumers as well as building an undesirable dependency, at the state level too, for revenues on a single sector. Further, heavy sales tax levies lead to a high degree of cascading effect on retail selling price. The Empowered Committee of State Finance Ministers deliberating on the implementation of VAT should also be entrusted with the task of evolving a uniform policy on sales tax levies on petroleum products.

Further, on irrecoverable local taxes, the first best solution is to persuade the concerned Sate Governments/local bodies to withdraw such levies in view of their distortionary impact. Alternatively, the second best option is to encourage the State Governments/local bodies to replace the entry tax/octroi by a surcharge on sales tax on finished petroleum products. The State Government can compensate the local body out of the surcharge it collects. However it may be reiterated that the most desirable option is to eliminate all such duties.

There has been a general consensus on the recommendation of the Rangarajan Committee, on state tax rationalization. Though, most states have adopted VAT, there is no uniformity in the tax rates and procedures amongst various States. In addition, taxes levied by local bodies distort the playing field. Government may put pressure on the states to eliminate irrecoverable taxes such as octroi and entry taxes and, if required, convert these taxes to recoverable taxes.

At a time when the country is entering into FTAs with different countries to form a larger market, it is ironical that we have a fragmented market within the country. It is absolutely essential to have a common market for Oil products based on uniform VAT rate throughout the country. VAT should provide set off for local taxes such as entry tax and octroi, in case these taxes are not to be eliminated.

The ultimate solution lies in implementing a unified Goods and Services Tax (GST) on petroleum products across the country. The Government has already announced their intent to put in place a GST structure by 2010. It is hoped that GST would cover the full gamut of taxes and provide set off for taxes, including service tax, on inputs, whether at the municipal level, state level or central level while placing imports at par with domestic production.

Current effective rates of VAT/Sales Tax on petrol and diesel

The current effective rates of sales tax on major petroleum products as on 1st March'2007 are given below:

(Percentage)

  Petrol Diesel
ANDHRA PRADESH 33.00 22.25
ARUNACHAL PRADESH 20.00 12.50
ASSAM 25.75 15.50
BIHAR 27.00 20.00
CHHAT1SGARH 25.00 25.00
CHANDIGARH 22.03 12.54
DELHI 18.16 11.68
GOA 22.00 21.00
GUJARAT 26.00 24.00
HARYANA 18.16 11.21
HIMACHAL PRADESH 25.00 14.00
JAMMU & KASHMIR 22.71 12.00
JHARKHAND 20.00 20.00
KARNATAKA 28.00 20.00
KERALA 29.01 24.69
MAHARASTRA       
1.- MUMBAI, THANE AND NAVI MUMBAI 30.75 28.00
2. - OTHERS 29.67 25.00
MADHYA PRADESH 28.75 28.75
MANIPUR 18.09 11.66
MEGHALAYA 20.40 12.75
MIZORAM 20.00 12.00
NAGALAND 21.00 12.60
ORISSA 20.00 20.00
PUNJAB 28.48 8.23
RAJASTHAN 29.42 21.87
SIKKIM 20.02 12.74
TAMIL NADU 30.00 23.43
TRIPURA 20.00 12.50
UTTARANCHAL 22.80 19.59
UTTAR PRADESH 26.00 22.00
WEST BENGAL 27.77 20.73
Note: Excludes Entry Tax wherever applicable

 

States which have recently reduced the sales tax on petrol and diesel in the wake of increase in the prices of petrol and diesel in the first week of June 2006.

The following states have reduced the value added tax/sales tax on petrol/diesel after the hike in prices affected on 06.06.2006

Sl. No.  Name of State Revised (applicable in Feb'07) Pre-Revised
Petrol Diesel Petrol Diesel
1 Andhra Pradesh 33% 22.25% 34% 23%
2 Tamil Nadu 30% (No revision in rate) 23.43% 30% 25%
3 Himachal Pradesh@ 25% (Tax Rebate: Re. 0.50/litre.) 14% (Tax Rebate: Re.0.14/litre 25% 14%
           
4.1 Maharashtra 27% +Rs.1/- litre 25% 29% + Re. 1/litre  31% + Re. 1/litre
4.2 Mumbai, Thane and Navi Mumbai 28% +Rs.1/-litre 28% 30% +Re. 1/litre 34% +Re. 1/litre
5 Delhi 20% (Tax Rebate: Rs.668/KL) 12.50% (Tax Rebate: Rs.223/KL) 20% 12.50%
6 Goa 22% 21% 25% 23%
7 Uttaranchal 25% (Tax Rebate: Rs.0.78/litre) 21% (Tax Rebate: Re.0.38/litre) 25% 21%
8 Haryana 20% (Tax Rebate Rs.668/KL in Ambala) 12% (Tax Rebate (Rs.214/KL in Ambala) 20% 12%
9 Manipur 20% No VAT applicable to the extent of Rs.3.36 per litre 12.50% No VAT applicable to the extent of Rs.1.80 per litre 20% 12.50%
10 Assam 25.75% 15.5% 27.5%  16.5%
11 Punjab * 27.5%+Re.1/litre 8.80% 27.5% + Re.1/litre 8.80%

@ Tax rebate withdrawn effective 20/02/2007.

*Punjab - Amount equal to increase in prices of petrol and diesel (including the duties and levies charged thereon by the Central Government) taking effect from 6th June, 2006, shall not form part of the sale price for the purpose of VAT.

Share of taxes and duties in retail selling price of Petrol and Diesel in four metro cities

The break-ups of price components of petrol and diesel in four metros are detailed below:

Share of duties and taxes in Retail Selling Price of Petrol 

Rs./Litre

S. No.

Particulars

Delhi

Mumbai

Chennai

Kolkata

1

Price without Customs Duty, Excise duty and Sales tax components

20.29

20.08

19.95

20.30

2

Custom Duty (Based on 1st FN of March'07)

1.30 

(3%)

1.30

(3%)

1.30 

(3%)

1.30

(3%)

3

Excise Duty {levied @ 6% + Rs. 13.00/litre plus 3% education cess)

14.67 

(34%)

14.72 

(30%)

14.69 

(31%)

14.70 

(31%)

4

Sales Tax (including irrecoverable taxes)

6.59 

(15%)

12.31

(25%)

11.54 

(24%)

10.60 

(23%)

5

Total of Customs Duty, Excise Duty and Sales tax components (2+3+4)

22.56

(53%)

28.33

(59%)

27.53

(58%)

26.60

(57%)

6

Retail Selling Price (1+5)

42.85

48.41

47.48

46.90

* Figures in bracket give the components of customs duty, excise duty and sales tax as a % of S.No.6

Share of duties and taxes in retail selling price of Diesel

Rs./Litre

S. No.

Particulars

Delhi

Mumbai

Chennai 

Kolkata

1

Price without Customs Duty, Excise duty and Sales tax components

21.01

20.89

20.89

20.93

2

Custom Duty (Based on 1st FN of March'07)

1.38

(5%)

1.38

(4%)

1.38 

(4%)

1.38

(4%)

3

Excise Duty (levied @ 6% + Rs. 13.00/litre plus 3% education cess)

4.70

(16%)

4.72

(14%)

4.70

 (14%)

4.71

(14%)

4

Sales Tax (including irrecoverable taxes)

3.16

(10%)

7.97

(23%)

6.34 

(19%)

5.86

(18%)

5

Total of Customs Duty, Excise Duty and Sales tax components (2+3+4)

9.24

(31%)

14.07

(40%)

12.42

(37%)

11.95

(36%)

5

Retail Selling Price (1+5)

30.25

34.96

33.31

32.88

* Figures in bracket give the components of customs duty, excise duty and sales tax as a % of S.No.6

Contribution of petroleum sector to Central and State Government Exchequers

The contribution of petroleum sector to Central and State Government Exchequer is given below:

Estimated Contribution to Exchequer

(Rs./Crs.)

  2003-04 2004-05 2005-06
CONTRIBUTION TO CENTRAL EXCHEQUER
CUSTOMS DUTY 9552 11697 9157
CESS 4766 4891 4884
EXCISE DUTY 35364 38150 47180
ROYALTY 1620 2181 2306
CORPORATE TAX 10038 11180 10896
DIVIDEND 6320 7641 7229
TAX ON DIVIDEND 1110 1513 1315
OTHERS (includes service tax) 425 439 347
TOTAL 69195 77692 83314
CONTRIBUTION TO STATE EXCHEQUER
SALES TAX 32080 38935 46667
ROYALTIES 1643 2251 3199
DIVIDEND TO STATE GOVT. 18 21 19
Octroi, Duties (incl. Electricity duty) 1032 1313 2211
OTHERS 408 734 157
SUB-TOTAL 35180 43254 52253
TOTAL CONTRIBUTION TO EXCHEQUER 104375 120946 135567

Notes: Data given above is as provided by Oil Companies:

Following Oil Companies Are Covered: ONGC, OIL INDIA, IOC, HPC, BPC, IBP, CPCL, KRL, BRPL, MRPL, GAIL, IMRL , EIL, And RIL (Petroleum Sector)

BPC data includes KRL for the year 2005-06 consequent upon merger.

Changes in the customs and excise duty in the petroleum sector during the recent past

The rates of customs and excise duty applicable on crude oil and major petroleum products are tabulated below:

Changes in customs duty rates with effect from 1st April 2002

(Percentage)

Product As on
1/4/2002 1/3/2003 9/7/2004 19/8/2004 1/3/2005 14/06/2006
Crude 10 10 10 10 5 5
Motor Spirit 20 20 20 15 10 7.50
Diesel 20 20 20 15 10 7.50
Kerosene (PDS) 10 10 10 5 Nil Nil
LPG 10 10 10 5 Nil Nil

Note:

  1. The NCCD @ Rs. 50/pmt has been imposed with effect from 01.03.03 on imported crude.

  2. With effect from 09.07.04 - An additional levy of Education Cess @ 2% has been imposed. Revised to 3% effective 01/03/2007.

Statement showing Excise Duty on Major Petroleum Products & on Crude Oil Since 1st April' 2002

Product As on
1/4/02 4/6/02 1/3/03 16/6/04 9/7/04 19/08/04 1/3/05 1/3/06 1/3/07
Crude (cess) (Rupees/Ml) 1800 1800 1800 1800 1800 1800 1800 2500 2500

Petrol-Advalorem Specific

Rs/Ltr  at Delhi

32.00% Rs.7/Ltr

10.53

30.00% Rs.7/Ltr

10.82

 30.00% Rs.7.50/Ltr

11.81

26.00% Rs.7.50/Ltr

11.97

26.00% R.7.50/Ltr

11.07

23.00% Rs.7.50/Ltr

11.90

8.00% Rs.13/Ltr

14.59

8.00% Rs.13/Ltr

14.59*

5.00% Rs.12/L

14.67*

HSD-Advalorem Specific

(Rs/Ltr at Delhi

16.00%

Re 1/Ltr

2.85

14,00%

 Re 1/Ltr

2.80

14.00%

 Rs 1.50/Ltr

3.59

11.00%

Rs 1.50/Ltr

3.32

11.00%

Rs 1.50/Ltr

3 32

8.00%

Rs 1.50/ltr

3.32

8.00%

Rs 3.25/Ltr

3.01

8.00%

Rs 3.25. Ltr

4.80*

6 00%

Rs 3.25 Ltr

4.70*

Kerosene (PDS) 16.00% 16.00% 16.00% 16.00% 16.00% 12.00% Nil Nil Nil
LPG (Dom.) 16.00% 16.00% 16.00% 8.00% 8.00% 8.00% Nil Nil Nil

*The Excise Duty on Current Retail Setting Price at Delhi is Rs 14.67 per Litre and Rs.4.70 per Litre on Petrol and Diesel respectively.

NOTE:

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