On Wednesday (May 30) Kerala's Left Front government slashed fuel prices by Re 1. With prices moving north every single day, this move from the Kerala government drew populist praise.

Pinarayi Vijayan, Kerala chief minister, took the high moral ground and said: This is our message to the central government. At a time when the nation has been demanding a reduction in prices, the central government hasn't done anything.

The state will take a Rs 509-crore hit because of the price cut, according to the chief minister. But the political message is clear. It's now the turn of the Bharatiya Janata Party (BJP) -- in power at the Centre and in over 20 states -- to match Kerala's move.

However, beyond the Re 1 price slash is pure political one-upmanship. The price cut will dent Kerala's revenues for sure. But not to the extent that the government suggests.

"A top Kerala finance ministry official told India Today TV: "The basic idea is not to slash tax on fuels. But charge Re 1 less per litre of petrol and diesel. That way the state will continue to earn from the high crude prices."

Sources said that the state is not ready to announce a tax cut as it will reduce the states revenues if there is a downward revision.

Arithmetic of Kerala relief

Kerala currently charges 34 per cent state value-added tax (VAT) on fuels. This is levied on the price of fuels that includes the days refinery price + central excise of Rs 19.48 on a litre of petrol or Rs 15.33 per litre on diesel. The central levy is a fixed amount.

For eg: If the refinery price was Rs 37 for a litre of petrol

Refinery price + central excise: Rs 37 + Rs 19.48 = Rs 56.48

34 per cent Kerala VAT on this amount translates into Rs 19.20

Kerala government will now give Re 1 rebate and charge only Rs 18.20.

If oil marketing companies hike the price of a litre of petrol to Rs 39, then the Kerala VAT will be on Rs 58.48 (Rs 39 + Rs 19.48 central excise).

At 34 per cent VAT its per litre earning will be Rs 22.80.

If it sacrifices Re 1 it still earns Rs 21.80 per litre of petrol.

Please note that for a Rs 2 per litre refinery price of petrol (with central excise remaining the same) the state earns Rs 3.60 each a litre extra without the sacrifice.

Plus the well known secret is that petrol and diesel pricing are a win-win game for states as besides the VAT collection it gets 42 per cent of the share in central excise as per the 14th Finance Commission recommendations.

Why cant other states do a Kerala

Interestingly, while the retail price of fuels have gone up, the price dealers pay has come down drastically since 2013.

The price of petrol charged to dealers during 2013-14 was Rs 47.18 per litre, way more than the current charge of Rs 37.19 .

The government's effective tax rate on petrol in 2013 was at around 43 per cent and presently it is a little over 100 per cent.

Similarly, in 2014 dealers had to pay Rs 52.68 per litre for diesel. In April 2018 the per litre price was around Rs 37.42 against the Rs 72.21 paid by the consumer

According to the finance ministry's revenue collection estimates, the central government expects to collect more than Rs 2.5 lakh crore by levying taxes on petroleum products by the end of this fiscal. This is a massive jump from the gross revenue collection of around Rs 88,600 crore in 2013-14, in the last fiscal the collection was just above Rs 2 lakh crore.

The Centre needs this money for the slew of sabka saath sabka vikas schemes. Thats exactly the reason why the states too dont want to give up revenue -- they too have schemes to fund.