Petrol, diesel prices fall as Modi government cuts excise duty by Rs 2 litre; move to cost Rs 13,000 cr

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New Delhi | Updated: October 4, 2017 10:47:58 AM

The government on Tuesday announced a reduction in the excise duties on diesel and petrol of Rs 2 per litre each — 11.5% and 9.4%, respectively — in a move that could render the exchequer poorer by Rs 13,000 crore in the second half of the fiscal, but help the ruling coalition counter the mounting political pressure on it owing to the rising consumer prices of these items.

petrol price cut, diesel price cut, petrol rate cut, diesel rate cutThe tax cuts will force the Centre to look for alternative ways to boost receipts, with an aggressive push to PSU divestment, including strategic sales looking an obvious avenue as non-tax revenues are subdued and more clarity needs to emerge on GST receipts.

The government on Tuesday announced a reduction in the excise duties on diesel and petrol of Rs 2 per litre each — 11.5% and 9.4%, respectively — in a move that could render the exchequer poorer by Rs 13,000 crore in the second half of the fiscal, but help the ruling coalition counter the mounting political pressure on it owing to the rising consumer prices of these items.

The tax cuts will force the Centre to look for alternative ways to boost receipts, with an aggressive push to PSU divestment, including strategic sales looking an obvious avenue as non-tax revenues are subdued and more clarity needs to emerge on GST receipts.

The Centre’s decision comes ahead of Wednesday’s meeting of the RBI’s monetary policy Committee — most experts expect the panel to hold rates and be dovish on the Centre’s reported plan to announce a fiscal stimulus to pep up demand in a slowing economy.

This is the first time the Modi government has reduced the tax on petroleum after it assumed office. It had increased the excise on diesel 386% and that on petrol by 126% since October 2014. The tax cuts have the character of a moderate fiscal stimulus, as reduced transportation costs would have a sobering effect on prices and boost consumption.

In recent weeks, global crude prices have risen (see chart).

“Due to the increase in the international prices of petrol and diesel, during the last few weeks, the retail selling prices of petrol and diesel at Delhi have risen to Rs 70.83 a litre and Rs 59.07 a litre, respectively, as on October 2, 2017. This rise in the prices of petrol and diesel is also reflected in WPI inflation, which has increased to 3.24% for the month of August 2017, compared to 1.88% for the month of July 2017,” the finance ministry said in a statement.

While opposing the idea of cutting central excise to cushion the consumers, noted energy expert Kirit Parikh had said instead, the government could look at adjusting the excise duty rates and make them equal for both diesel and petrol. “This can be done in a way that does not change the excise duty revenue of the central government. It will increase the price of diesel by 2% and reduce the price of petrol by 6%,” he had said.

The Centre’s fiscal deficit during the first five months (April-August) of the current fiscal was 96.1% of the Budget estimate at Rs 5.25 lakh crore; the deficit during April-August of the last fiscal was 76.4% of the corresponding target.

Unlike excise duties, state VAT on petroleum products is levied ad valorem. These duties contributed to the recent increase in prices. States also get 42% of the divisible pool of the central taxes.

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