Finance Minister Arun Jaitley on Friday urged states to reduce VAT on petroleum products due to concerns regarding the rise in input costs due to the transition to GST regime.

“The letter by Finance Minister to Chief Ministers highlights the concern being raised by the manufacturing sector,” the Finance Ministry said in a statement.

The industry had flagged concerns on increase in the cost of petroleum products, used as inputs for manufacture of goods, due to cascading of taxes.

In the pre-GST regime, because the petroleum products as well as the final goods produced both attracted VAT, input tax credit of petroleum products was allowed to varying extent by different states.

However, in the post-GST scenario, the manufactured goods attract GST while the inputs of petroleum products used in the manufacture attract VAT and, therefore, it would lead to cascading of taxes.

In view of this, in the pre-Goods and Services Tax regime certain states had lower rate of 5 per cent VAT on Compressed Natural Gas (CNG) used for manufacturing of goods.

Some states also had lower rate of VAT on diesel used by manufacturing sector.

“Thus, Jaitley has requested other states also to explore the possibility of having a lower rate of VAT on petroleum products used for manufacturing of those items on which there is GST, so that there is minimum disruption in the costing of goods,” it said.