High inflation: Centre unlikely to cut taxes on petrol and diesel

By: |
August 02, 2021 3:45 AM

The RBI has said on record on more than one occasion that it would expect the Centre and states to calibrate the taxes on auto fuels to check inflation.

Retail inflation stayed above the Reserve Bank of India’s (RBI’s) tolerance level for a second straight month in June (6.26%), as price pressure remained elevated across food and fuel segments.While the brokerage expects the policy normalisation to begin from late FY22, it thinks liquidity surplus recalibration can begin sooner.

The Centre may not cut the taxes on petrol and diesel despite the spike in inflation, as it reckons that the move could cause a substantial fiscal slippage without yielding much on the inflation front, according to official sources.

Retail inflation stayed above the Reserve Bank of India’s (RBI’s) tolerance level for a second straight month in June (6.26%), as price pressure remained elevated across food and fuel segments. Wholesale price inflation eased in June to 12.07% from a series-high of 12.94% in the previous month but price pressure in fuel and manufactured items still remained high. Chief economic adviser KV Subramanian said recently that retail inflation could come in at less than 6% in July.

The Union government, the sources said, could not afford to undermine a revenue-efficient tool like the assorted duties and cess on petrol and diesel, which have helped generate resources for infrastructure and other developmental expenditure. “Minor changes in (taxes on the two auto fuels) will not alter inflation expectations much. Whereas, these taxes are lowered by Rs 10/litre, the impact on the fiscal deficit will be 0.58% of gross domestic product (GDP) for the full year and 0.44% for nine months,” an official said.

The RBI has said on record on more than one occasion that it would expect the Centre and states to calibrate the taxes on auto fuels to check inflation.

Currently, the taxes on unbranded petrol and unbranded diesel are Rs 32.90/litre and Rs 31.80/litre, respectively; the taxes include basic excise duty of Rs 1.4, road and infrastructure development cess of Rs 18, agriculture and infrastructure development cess of Rs 2.5 and special additional excise duty of Rs 11. A similar tax structure prevails for diesel on which the total Union government-imposed taxed are Rs 31.8/ litre. These taxes are a big component of the final prices of the fuels to the consumer and the bulk revenue from the taxes are not shared with the state governments being not part of the divisible pool.

The taxes were increased by Rs 3 per litre on petrol and diesel from March 14, 2020. It was further increased by Rs 10/litre on petrol and Rs 13/litre on diesel from May 6, 2020. The excise duty on petrol and diesel fetched the Centre Rs 94,181 crore in Q1FY22. Given that the fuel consumption could rise in the second half of a year, the FY22 receipts from petrol and diesel could be around Rs 4 lakh crore or about Rs 90,000 crore more (subject to moderation if the third Covid wave occurs) than FY22 Budget estimate, officials reckon.

Recently, finance secretary TV Somanathan told FE that even with the relief package announced recently, the fiscal cost of which is estimated at around Rs 1.5 lakh crore, the fiscal deficit target of 6.8% of GDP for 2021-22 would be adhered to, given the possibility of revenue receipts exceeding the budget estimate and expenditure rationalisation being undertaken (most departments were asked to contain spending in Q2 at 20% of BE against norm of 25%).

Robust receipts from excise duty, which rose 88% year-on-year to Rs 3.34 lakh crore in FY21, helped the Centre register a 5.9% increase in its net tax revenue receipts in the financial year despite disruptions in economic activities due to Covid first wave. Higher central levy also helped the states to benefit as they levy sales tax/VAT on petroleum product prices inclusive of the Union government’s taxes. In FY21, state governments’ combined tax collections from the auto fuels was Rs 2 lakh crore, the same level as in FY20. With taxes constituting over 50% of retail sales price, petrol prices crossed over Rs 100/litre in many parts of the country.

With the weight of fuels like petrol, diesel and other fuels in the CPI being only 2.52%, the government is discounting any substantial inflationary pressure on account of higher fuel prices. However, its indirect impact through higher freight cost feeds into most other prices. Lower excise on fuels means higher disposable income or higher savings which has positive impact on the economy, said India Ratings chief economist DK Pant. “If producers are not passing higher transportation cost their profitability is going to hit leading to lower investment and consumption. The government’s fuel taxation policy is going to impact all three economic agents – government, producer and consumer,” Pant added.

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