Tax Change Roils U.P. Lubes Biz

The Indian state of Uttar Pradesh has effectively imposed a steep tax hike on lubricants by removing them from the list of items subject to its value added tax. Blenders warn that the move will lead to closure of manufacturing plants in the countrys most populous state.

The case shows different ways that governments can tax lubricants and some of the potential impacts of those actions.

Under the VAT purview, finished lubricants were taxed at a rate of 14 percent in Uttar Pradesh. After being reclassified on Jan. 11, they are now subject to a one-time tax of 21 percent. But the practical impact is higher than those numbers suggest, according to local lubricant producers. The president of the Kanpur Lubricants Association, Ramshankar Gupta, noted that the VAT system allowed manufacturers to obtain a refund of up to 5 percent as a credit for input materials, reducing the effective rate of the VAT to 9 percent. The one-time non-VAT tax provides no such credit.

Industry sources said the higher taxes will probably be passed down the supply chain to end users. Gupta said that not only will Uttar Pradesh consumers have to pay more for lubricants, but that the government decision is a serious blow for local manufacturers. He claimed three companies have already stopped manufacturing lubricants in Kanpur, the states commercial center, and started trading activity. The government may initially gather more revenues as a result of the tax change, he argued, but in the long run it will lose because factory closings mean job losses and social unrest.

But the governments move has been welcomed by lubricant traders of the state. Amit Srivastava, of Silver Lubricants, noted that the one-time tax is charged to manufactures and importers, meaning that traders, which are subject to VAT, now receive less scrutiny from government officials. Sources said the petrol and diesel pump association of Uttar Pradesh had demanded the tax change in hopes of escaping government harassment. Petrol and diesel were already categorized as non-VAT items, but because stations also sell lubricants, they allegedly were harassed by tax collectors.

Uttar Pradesh Additional Commissioner (Law) of Commercial Tax Department Yogendra Kumar, who is responsible for taxation of lubes, declined an interview request from Lube Report Asia. Officials in his department, speaking on condition of anonymity, confirmed that the governments move is intended to increase revenues. Industry insiders speculated that it was convenient for the government to grant the fuel pump associations plea in a way that increases revenue.

States across India subject lubricants to value added taxes. States including Uttar Pradesh neighbors Madhya Pradesh and Rajasthan set the VAT rate for lubes at 12.5 percent.