22 June:With the Centre’s move to hike petro prices forcing states to go for tax cuts, they are likely to ask the Central govt to use small portion of the burgeoning forex reserve to fund the rising oil import bill, estimated at over US$ 8 bn in April.
"Our forex kitty is increasing. Why cannot a part of it be used to take care of the increasing oil import bill, which in any case is paid in dollars… The way petrol and diesel are handled is not the state subject and states are being asked to take a burden," sources in VAT panel said.
However, the proposal did not find much support from economists who said that the use of forex to service the oil import bill is practically not feasible, albeit the idea may sound viable theoretically.
At a recent meeting of Empowered Committee of State finance Ministers on VAT, the issue came up when the panel deliberated on Rs 8,000 crore hit that states will have to bear this fiscal on account of reduction in sales tax on petro products.
States Finance Ministers questioned as to why the burgeoning forex reserves are not being used to foot the oil import bill, instead of burdening states by asking them to cut taxes.
Since the import bill has to be financed in dollars, why the rupee is being mobilised for the purpose, they said, adding part of forex could be used which would also partly help in containing inflation.
Mahesh Purohit, director with Foundation for Public Policy and Research, said that the use of forex may not solve the problem.
"Cut in tax is definitely a better solution especially now that we have a buoyant tax collection. We can afford to cut taxes without any major loss in revenue," he said.
The proposal to use a part of the forex to fund infrastructure projects has not borne any substantial fruit, he pointed out.
Echoing the same sentiment National Council for Applied Economic Research (NCAER) Director Suman Bery said that the use of forex would not address the issue and would lead to other problems in the economy, management of which may not be easy.
India had about 310 billion of forex reserves as on 13th June this year.Its import bill on petroleum products rose 46.2 percent to touch 8 billion dollars in April year-on-year.
According to estimates, states would stand to lose at least Rs 8,000 crore on account of cut in sales tax on various petro products.State finance ministers have shown discomfort with the revenue loss and asked the Centre to share half of this burden.
They also asked the Centre to explain the basis of fixing prices of petro products.The Centre had on 4th June announced a Rs 5 a litre increase in petrol, Rs three a litre in diesel and Rs 50 a cylinder in LPG.
In a message to the nation to explain the Centre’s decision, Prime Minister Manmohan Singh appealed to states to cut their taxes on petro products, following which many states had reduced these levies.
According to VAT panel, 10 out of 33 states and union territories have cut sales tax on petrol and 15 on diesel.However, some states like Delhi have only cut tax on LPG. Courtsey: DD NEWS