Srinagar, Nov 4: The union government has urged states to reduce VAT on petrol and diesel following its own decision to cut excise duty on petrol and diesel by Rs 5 and Rs 10 respectively.
As of now, nine NDA ruled states have heeded the call and have announced reduction in state level taxes in diesel and petrol.
Considering that J&K is currently under the direct central rule, analysts now ask if the J&K administration will heed the central government call and announce its own VAT reduction decision to bring relief to common people here.
The Ministry of Finance, in a notification on Wednesday evening, said the excise duty on petrol will be reduced by Rs 5 and the excise duty on diesel will be reduced by Rs 10 from Thursday, and the prices of petrol and diesel will come down accordingly.
High fuel prices in J&K
Diesel price in Kashmir has hit the historic century on October 24 this year with the fuel being sold at Rs 100.22/L at retail fuel outlets. Petrol price continues an upward trend as well, with the cost having crossed Rs 110.47/L on October 24 in Srinagar, petroleum company officials told Ziraat Times.
Prices in Jammu region
While prices of both diesel and petrol continue to rise in Jammu region as well, the prices have remained lower than Kashmir, where prices get inflated due to high transportation costs between Jammu and Srinagar and other district headquarters. In Jammu diesel price were still under 100, selling at Rs 96.92/L on 24 October, while petrol price was Rs 106.63/L.
Central excise duty, Sales Tax and VAT structure for petrol and diesel in J&K
Presently, the central excise duty, Sales Tax and VAT structure for petrol and diesel are the main price drag on fuel in J&K.
Petrol and diesel price band in J&K has two tax components – central excise duty (which is in the range of Rs 13-16 a litre on petrol and diesel) and the sales tax/VAT at the state level.
Sources in the Finance Department of J&K government tell Ziraat Times, as of June, 2021, Sales Tax and VAT for petrol in J&K consisted of 24% Motor Spirit Tax Rs.5/Litre employment cess. For diesel, sales Tax and VAT consisted of 16% Motor Spirit Tax + Rs.1.50/Litre employment cess.
This tax structure is seen as a major challenge to a large range of fuel-driven activities of J&K’s economic system.
Economic Impact of high fuel prices in J&K
As retail prices of petrol and diesel hit record-high levels in late October in both Kashmir and Jammu regions, economic analysts see the unprecedented daily hike as a major stumbling block for economic recovery in Jammu & Kashmir.
As both petrol and diesel prices crossed the 3-digit mark across J&K, cost of living is becoming unaffordable for vast sections of the people who do not have an assured salary or income.
Economic analysts Ziraat Times spoke to opine that the higher fuel prices would severely dent J&K consumers’ disposable incomes and the end result will be slower economic growth and long recovery, if at all it would come by in the near future.
The available data of key economic activities in J&K suggests that its economy is far from coming back to the pre-August 2019 level. Most of the economic activities have either stalled or are barely sustaining, resulting in slower revenue collection rate, unemployment, lesser disposable incomes with the people of J&K.
Why a tax reconsideration in necessary in J&K
There are several reasons why economic experts feel that the government should reduce tax on oil. Inflation is the main reason.
Information collected by Ziraat Times through FMCG and Mandi system reveals that J&K’s retail inflation has already breached the Reserve Bank of India’s “comfort level” mark – meaning that the current inflation level is likely to have a cascade effect across sectors and economic activities, making economic recovery – crucial to saving the residual jobs and economic activities in the private sector – even more difficult.
If petrol and diesel prices remain at their current levels or increase in future, economic analysts believe, the demand for two essential fuels in J&K will decline sharply and ultimately hurt the government’s revenue collection.
Fuel prices directly impact several sectors including passenger transport, goods transport, food delivery and e-commerce in J&K. The cost that consumers bear for such services — directly or indirectly — have been rising gradually over the past two years as a result of rising fuel prices in J&K, much higher than the national average.
Stress on low-income people in J&K
J&K’s poor households are presently paying more money for other commodities and services that are indirectly dependent on fuel prices. On the other hand, incomes have either gone down or remain at the same level.
Today, there is an increasing trend of distress selling off of cars, as many people with no sustained, secure incomes are finding the daily costs of car travel unaffordable. “Driving the car for daily work for me is not possible any more,” said Aijaz Ahmed, who has already lost his job in a Srinagar hotel and is working as an insurance agent now.
Nikhil Singh, who works as an engineer in a local factory in Jammu, drives his car to work once a week only. “I leave my car at home now. Sometimes I pool cars with colleagues and we share fuel costs. Or sometimes I simply use public transport. But using public transport is risky in this pandemic situation. But what option do I have? My salary can’t afford driving the car anymore”, he told Ziraat Times.
Impact on the larger economy
At the moment, India has the highest fuel rates among its neighbouring countries and the prices are likely to climb further as global oil rates rise. Experts have warned that rising fuel rates could severely derail India’s economy, which is already under pressure due to the impact of the second Covid-19 wave.
Impact on agriculture sector
Key agricultural and horticultural products, mainly vegetables from Kashmir valley, are losing their competitive edge because of high transportation costs involved in export.
“This situation might change only if fuel costs are brought down and if there is reliable railway and road connectivity between Srinagar and Jammu. As of now that looks like a mirage”, a vegetable exporter from Kashmir said.
