State Bank of India said that the recent increase in petrol and diesel prices would bring an unexpected bonanza for the state governments. The states could make a profit of around Rs 227 billion that is much more than the estimated budget for the current fiscal. Seeing the increased revenue, SBI suggested that if the states could cut an average petrol price by Rs 3.20 per litre and diesel by Rs 2.30 per litre it won’t affect the states’ budget for the current fiscal.
“This windfall gain will have a positive impact on state finances, which might push down the states’ fiscal deficit by 15-20 bps, other things remaining unchanged. We also estimate that since the states are having an incremental revenue over the budgeted one, they could cut on average petrol prices by Rs 3.20 /litre and diesel by Rs 2.30/litre, without affecting their revenue arithmetic. States like Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu, Andhra Pradesh, Rajasthan, and Karnataka have the privilege to cut petrol prices by at least Rs 3 from their existing rates and Rs 2.5 on diesel,” said the SBI in a report.
States imply VAT on the cost of Petrol and diesel prices as well as on the dealers’ commission. After researching on 19 states, SBI discovered that the VAT implied on petrol in these states is in between 24 per cent to 39 per cent by the state government whereas, for diesel, it lies in between 17 per cent to 28 per cent. The price rise in the fuel is directly proportional to the VAT charges.
However, the benefit goes straight to the government. During 2017-18, states earned around Rs 1.84 lakh Crore from the VAT due to price rise in fuel. The bank estimated state government’s profit from the VAT of around Rs 1.84 lakh crore in this financial year.
The rise in diesel prices have gone up by Rs 5.6 and 6.31, that surpassed previous highs across metros, gains significance as it is mostly used in vehicles for transportation of food and agricultural products, which could lead to higher inflation.