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Why relief from soaring petrol, diesel prices is unlikely to come anytime soon

While petrol, diesel prices have been on the boil for some time now, soaring to fresh record highs on Tuesday despite a nation-wide protest conducted by opposition yesterday, a relief is unlikely anytime soon.

A few states such as Rajasthan and Andhra Pradesh have announced a VAT cut to provide relief to the common man.

While petrol, diesel prices have been on the boil for some time now, soaring to fresh record highs on Tuesday despite a nation-wide protest conducted by opposition yesterday, the Narendra Modi-led government has ruled out any immediate reduction in excise duty in order to bring down the retail prices of auto fuels, and instead urged the states to take action.  A few states such as Rajasthan and Andhra Pradesh have announced a VAT cut to provide relief to the common man. While Andhra Pradesh announced a Rs 2 per litre cut in VAT on petrol and diesel, poll-bound Rajasthan’s announcement of a 4% cut came on Sunday. However, other states have remained largely unenthusiastic. Why is it so difficult for governments to cut taxes on auto fuels?

The government is highly reliant on the tax revenue from petrol and diesel, and they remain a  key source for both the Centre and states, and a cut will hit their fiscal position. Notably, the Centre mopped up Rs 2.29 lakh crore from excise duty on petroleum products in 2017-18 and Rs 2.42 lakh crore in 2016-17. The excise duty on petrol is currently at Rs 19.48 per litre, and amounts to Rs 15.33 per litre on diesel. The Centre had also raised excise duty nine times between November 2014 and January 2016 to shore up its finances even as global oil prices fell. However, the excise duty cut came in just once — by Rs 2 per litre — in October last year.

Crude petroleum attracts 20% oil industry development cess, and a National Calamity Contingent Duty (NCCD) of Rs 50 per metric tonne. There’s no Customs duty on crude, but petrol and diesel attract a Customs duty of 2.5%. Rates of state sales tax or Value Added Tax (VAT) vary from state to state. Unlike excise duty, VAT is ad valorem, and results in higher revenues for the state when rates move up, notes an Indian Express report.

Apart from taxes, the government, both centre and the states have other earnings too, from the petroleum sector. Taking into account the cumulative amount from dividend income, dividend distribution tax, corporate/income tax and profit on exploration of oil and gas, the Centre earned a Rs 3.43 lakh crore in 2017-18 and Rs 3.34 lakh crore in 2016-17, from crude and petroleum products.

Further, contrary to popular belief, bringing petroleum related products under GST’s ambit too is unlikely to bring down the prices, as states are likely to levy additional taxes to boost revenues. Even if petrol and diesel are included under GST, prices are unlikely to fall, because of of the GST principle of keeping rates close to the earlier tax rates.

“Most people feel that if we put petroleum products under GST then the highest slab of 28% will be levied and prices will come down. [In fact,] It will affect prices only in a minor way,” Sushil Modi, Bihar Deputy CM had said at the PHD Chamber of Commerce and Industry’s national conclave on GST. According to Modi, the trend worldwide, has been that if petrol and diesel are included in GST, states levy additional taxes “over and above to prop up revenue”. “If they (states) forego (tax), how will they earn revenue?” he had asked.

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