Rising fuel prices: Oil bonds’ cost barely 10% of Centre’s extra revenue from fuel taxes

By: and |
August 19, 2021 4:15 AM

Put differently, the servicing cost of oil bonds upon the Centre in the decade mentioned would be just 9% of its additional revenues from fuel levies.

Clearly, the auto fuel taxes are proving to be a goldmine for the Centre, as it is faced with severe revenue constraints.Clearly, the auto fuel taxes are proving to be a goldmine for the Centre, as it is faced with severe revenue constraints.

Is the cost of servicing the legacy oil bonds, cited by finance minister Nirmala Sitharaman recently, a cogent reason for the Narendra Modi government not acceding to the demand for a reduction in the assorted levies on motor fuels, which have jacked up their prices to the end consumer and stoked inflation?

Well, the repayment obligations, which the oil bonds issued by the UPA government cast on the Modi 1.0 and Modi 2.0 governments, would be a substantive Rs 14.3 lakh crore lower compared with the additional net revenue to be collected by the Centre between FY15 and FY24 (the tenure of the two Modi governments), thanks to a series of tax hikes on the fuels under the Modi rule.

FE has estimated that the Centre could, net of transfers to the states, collect additional revenue of a whopping Rs 15.73 lakh crore between FY15 and FY24 from auto fuel levies if the current rates remain unchanged till the end of the Modi 2.0 government; in comparison, the oil-bonds servicing obligations, given the interest and principal repayments made/scheduled, would be just Rs 1.43 lakh crore, during the 10-year period.

Put differently, the servicing cost of oil bonds upon the Centre in the decade mentioned would be just 9% of its additional revenues from fuel levies.

Clearly, the auto fuel taxes are proving to be a goldmine for the Centre, as it is faced with severe revenue constraints. The bulk of the proceeds from these imposts is not being shared with the states because the Centre has intrusively assumed a larger part of the common fiscal resource space that must have been available to the general government. The Centre’s adventure, clearly, is to the detriment of state governments’ fiscal positions.

Since the Modi 1.0 government took over in May 2014, there have been as many as 12 instances of increases in the Centre’s auto fuel levies; the steepest increases were in March and May 2020. As a result, the Centre’s taxes on petrol and diesel are at Rs 32.9/litre and Rs 31.8/litre, respectively, at present, against the rates of Rs 9.48/litre and Rs 3.56/litre that prevailed in early FY15.

Moreover, the shareable part of the taxes has shrunk. For instance, while as much as 41% of the Central taxes on diesel were shared with the states under the relevant formula in FY15, just 5.7% is currently being shared with the states, meaning the restructuring of tax rates has hugely benefited the Centre.

Speaking to a group of journalists earlier this week, Sitharaman argued that the government’s ability to cut fuel taxes was constrained by the fact that it had to service oil bonds issued by the UPA government. While the UPA government apparently tried to show that it was cutting fuel taxes to reduce the price for consumers, it issued oil bonds, which had to be repaid by the current government out of taxpayers’ money, she said. Even states have raised taxes in recent years, she added.

When the Modi 1.0 government came to power in 2014, the pending liabilities (principal amount) for oil bonds were to the tune of Rs 1,34,423 crore. It repaid Rs 3,500 crore in 2015, leaving the outstanding amount at Rs 1,30,923 crore, which will have to be cleared between FY22 and FY26. Of this, Rs 41,150 crore more will have to be paid by FY24 (when the term of the current government expires) upon the maturity of some bonds.

This government had to pay an interest of Rs 70,196 crore on the oil bonds between FY15 and FY21. Another Rs 28,382 crore has to be paid by FY24. The UPA government had issued these bonds worth a total of Rs 1.44 lakh crore between 2005 and 2012, a practice that has since stopped.

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