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Budget Proposal: The LPG Dialectic

The LPG Dialectic Almost towards the end of his budget speech, finance minister P Chidambaram put forward a proposal with a bearing on centre-state relations that seems to have gone unnoticed. Underlining the


The LPG Dialectic

lmost towards the end of his budget speech, finance minister P Chidambaram put forward a proposal with a bearing on centre-state relations that seems to have gone unnoticed. Underlining the “imperative” need to moderate the price of liquefied petroleum gas (LPG) for domestic use, the minister complained, “States are taxing LPG (domestic) at high rates”. In order to check their proclivity in this regard and get the states “to bear a portion of the burden of high prices of petroleum products” the finance minister proposed to include LPG in the list of “declared goods” under the Central Sales Tax (CST) Act. The result will be that no state will be able to keep the rate of its value added tax/sales tax on LPG at more than 4 per cent, which is the rate fixed for taxation of interstate sales. The cap applies to the tax that a state can levy on goods “declared” to be of importance in interstate trade and commerce even when sold within its own jurisdiction.

While conferring the power to tax sale or purchase of goods on the states, the Constitution imposed some restrictions. One of them was intended to put a limit on the level of tax a state can impose on “goods declared by Parliament by law to be essential for the life of the community”. The rationale for this restriction came under close scrutiny by the Taxation Enquiry Commission (TEC) of 1953-54. The commission took a sharply critical view of the provision because of its implicit assumption that the central government acting through the Parliament can be a better judge of what is essential for the community in a state than the state legislature. The observations of the TEC in this context are worth recalling. Referring to the restrictions tied to the concept of “essentiality” the commission said: “In regard to the impact of the sales tax of a particular state on the people of that state, it seems to us unnecessary that the central government should exercise through parliamentary legislation, a jurisdiction which in terms of the state’s own powers is at once concurrent and overriding.”

Presumably in deference to the views of the commission, the CST Act, which was enacted in 1956 to regulate the taxation of interstate sales, confined the ambit of the restriction on the states’ powers of taxing intra-state sales only to goods of importance in interstate commerce. Goods so declared included cereals like paddy and wheat, coal and coke, raw cotton, jute, hides and skin, and oilseeds. These were indisputably commodities that went into interstate commerce on a large scale and since the sales tax operated on the “origin” basis, that is the state where the sale originates levies the tax no matter where the commodity is consumed, there was some justification for putting a ceiling on the sales tax a state could levy on them. Otherwise a state commanding a large share in the production of an industrial input like iron ore could extract “rent” for its products. However, three exceptions to this wholesome principle crept in. Textiles, tobacco and sugar were put under the “declared goods” category for which the states entered into a tax rental arrangement with the centre whereby additional excise duties would be levied on them, by the union government in lieu of sales tax. Harking back to the centre’s paternalistic attitude, an attempt was made later to enlarge the list to include consumer items considered essential by Parliament like medicines, but the move did not succeed because of opposition from the states.

In any case with the adoption of VAT by the states and their plans to move over to a destination based tax soon, the rationale for “declared goods” has lost its force. Under a destination based regime, goods sold in the course of interstate trade will not be subjected to tax in the state of origin: these will be taxed only by the state where they are finally used or consumed. It is thus only appropriate that the restrictions on the powers of the states in taxing sales within their jurisdictions, that is on their own citizens, emanating from the “declared goods” category be removed and the tax rental arrangement for the said three consumer goods mentioned above ended, as is reportedly under contemplation. To include a commodity that is essentially a consumer item at this stage is thus odd and runs counter to the direction of domestic trade tax reforms now under way.

What the proposal amounts to is an attempt to pass on a good part of the burden of the subsidy on LPG for domestic use to the states. From press reports it appears the price of LPG is not going to come down. The centre’s proposal will reduce the losses of the oil marketing companies while the states will lose revenue probably to the tune of Rs 4,000 crore in a year, more than offsetting the compensation being paid by the centre for their revenue loss from moving over to VAT. There is nothing to show that the National Development Council or the states were consulted. Surprisingly there is very little protest from the states either. The “dialectic” is not quite obvious. EPW

Economic and Political Weekly March 18, 2006

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