Here is why it will be imprudent for finance minister K N Balagopal to slash sales tax on petrol

On the face of it, the repeated increases in central taxes on petroleum products after Narendra Modi came to power have bolstered Kerala's revenues in a big way without the State having to move a finger.

Take the six years between 2014-15, when Narendra Modi's BJP came to power, and 2019-20, just before COVID-19 struck. In this period, Kerala's annual sales tax collection from petrol and diesel shot up from Rs 5,378 crore to Rs 8,074 crore, a whopping 50.1 per cent increase. This would seem disproportionately high considering that in these six years, petroleum sales in Kerala had grown only by 21 per cent, from 5390 metric tonnes in 2014-15 to 6534 MT in 2019-20.

Barely a month ago the Prime Minister even took Kerala by name and asked it to reduce the sales tax on petrol. It was a rare instance of public shaming of a state by a Prime Minister. Modi said that BJP ruled states had already shown the way when the Centre had slashed excise duty in November 2021; the excise duties on petrol and diesel were cut by Rs 5 and Rs 10 respectively on November 4, 2021.

Now with the second excise duty cut (Rs 8 for a litre of petrol and Rs 6 for a litre of diesel), there is intensified pressure on the LDF government in Kerala to reduce the sales tax percentage it imposes on petrol and diesel. Finance minister K N Balagopal has made it clear that Kerala will allow only the automatic reduction in sales tax that will happen when the centre cuts duties, and nothing more.

The states impose their sales tax/VAT on a figure that is the sum total of the basic price of fuel, central duties and dealer commission. So when the central duties are slashed, even if Kerala does not reduce its sales tax percentage, its sales tax revenue in rupee terms will fall correspondingly. As it stands, Kerala charges a sales tax of 30.80 per cent on a litre of petrol and 22.7 per cent on a litre of diesel.

The finance minister's adamant refusal to bring down the sales tax when inflation threatens to go out of hand might come across as political hubris. Even the Thrikkakara by-election has not tempted the finance minister to play to the gallery.

There are two reasons why the minister is right, and why he should ignore the Prime Minister's taunt.

One, Kerala's seemingly disproportionate gains in sales tax collection has dipped considerably after the pandemic. Since 2014-15, there was on an average 10 per cent annual growth in sales tax collection. However in 2020-21, after the pandemic struck, there was a 15 per cent negative growth in collections. From an all-time high of Rs 8,074 crore in 2019-20, it fell to Rs 6,924 crore in 2020-21. Provisional figures for 2021-22 show that the collection has dipped further to Rs 5,977 crore.

Two, Kerala's gains from the sale of petroleum products are modest when compared to other big states, especially the BJP-ruled ones. Finance minister K N Balagopal was not offering a lame excuse when he said that BJP-ruled states that reduced sales tax following the Centre's cut had deep pockets.

Consider Karnataka, a BJP-ruled state held up as an example by the Prime Minister. Karnataka had slashed sales tax on both petrol and diesel by Rs 7 when the Centre announced the November 2021 excise duty cut.

If Kerala's sales tax collection had grown by over 50 per cent in the six years between 2014-15 to 2019-10, Karnataka's went up by 77.45 per cent in the same period. And unlike in the case of Kerala, Karnataka's sales tax collection registered robust and steady growth in 2020-21 also.

Uttar Pradesh, too, had lessened its share of the burden on petroleum products last year. But in the six years from 2014-15 to 2019-20, when central duties were incrementally increased, UP's gain was 60 per cent in sales tax collection. Again, unlike Kerala, it saw encouraging growth in sales tax collections during the pandemic; Rs 20,112 crore swelled to Rs 21,956 crore.

The other big BJP state, Madhya Pradesh, witnessed a gain of 57 per cent in the six years till COVID struck. And even when the pandemic raged in 2020-21, its collections from petroleum products soared; from Rs 10,720 crore just before the pandemic to Rs Rs 11,908 crore during the pandemic year of 2020-21.

Himachal Pradesh, another BJP state, recorded a sales tax revenue growth of 88 per cent in the six years till the pandemic. And after the pandemic, the sales tax earnings are soaring like a kite that has severed from its thread; over 100 per cent was the increase in collection during the pandemic year when compared to 2019-20.

Gujarat, perhaps, is the only BJP-ruled state that had not gained from the regular increases in excise duties. Its annual sales tax collection has remained consistently in the high Rs 15,000-16,000 crore range for the last seven years.

Even non-BJP states like Odisha (92 per cent), Rajasthan (59 per cent) and Telangana (122 per cent) had accumulated more revenue than Kerala in the six years that saw regular increase in central duties. States that made less gains than Kerala till the pandemic - Tamil Nadu (47.57 per cent), Punjab (32.76 per cent) and West Bengal (35.43 per cent) - have found their revenue soaring during the pandemic in complete contrast to Kerala.

Maharashtra and Andhra Pradesh are the only big states that have fared poorly than Kerala in terms of petrol sales tax collections and, like Kerala, have found revenues dipping during the pandemic.