A day after it hiked value added tax (VAT) effectively making both petrol and diesel dearer for the average Delhiite, the opposition trained its guns on the Aam Aadmi Party (AAP) dispensation and took to the streets for going back on its pre-poll promise of slashing tax rates while financial analysts said the government's vision “didn't seem to be in sync with the basic principles of Economics”.

On Wednesday, the Delhi Government hiked VAT on both petrol and diesel from the present 20 per cent to 25 per cent and from 12.5 per cent to 16.6 per cent, respectively effectively translating into an increase of Rs. 2.78 per litre and Rs. 1.83 per litre.

The following day, entertainment tax, it was declared, had been doubled from the existing 20 per cent to 40 per cent effective this Monday even as country-made liquor was made dearer for consumers by the Excise Department which increased duty on its wholesale prices from the previous 210 per cent to 245 per cent, a 35 per cent rise, on wholesale prices with retrospective effect beginning on July 1 and Indian Made Foreign Liquor (IMFL) prices to follow suit.

This despite Deputy Chief Minister Manish Sisodia having termed the Annual Delhi budget for the current fiscal as “tax-free” in addition to the AAP's pre-poll promise of slashing existing VAT rates prior to the Capital having gone to polls earlier this year.

A cursory analysis of the AAP's maiden budget reveals an average increase of approximately 18 per cent in projected revenues from VAT, excise, stamps and registration, luxury and entertainment tax and tax from motor vehicles for the current fiscal despite an average deficit of over 15 per cent in the actual amount of revenue which it was actually able to realise.

When it came to VAT, there was actually a decrease of 12.90 per cent in the revenue realised through it, which stood at Rs. 18,289 in relation to the projected amount of Rs. 21,000 which had been projected.

Bipin Sapra, Indirect tax partner at Earnst and Young, India, said an increase in taxes, which served as the main source of revenue for state governments apart from grants from the Centre, was usually a symptom of two possible eventualities – either when it anticipated a reduction in finances from the Central government or when an increase in its own expenditure is foreseen.

On his part, Mr. Sapra advised against any increase in tax rates from the twin points of view of inflation and compliance.

“A high tax rate increases the propensity of the tax payers avoid payment of taxes. To tax one commodity at a high level to subsidize another does not make economic sense. Increasing VAT rates on goods when GST is impending, will distort rate calculations in the GST regime,” he said.