High excise duty and VAT on fuel results in high inflation, higher subsidy payments on fertilisers, food, etc, and low international competitiveness of Indian goods.
- By Uttam Gupta
In the wake of widespread destruction of demand triggered by Covid-19, failure of OPEC and non-OPEC suppliers to agree to a production cut, and the two front-line exporters from the respective groups viz. Saudi Arabia and Russia vying to capture the shrinking market, the price of crude oil has plunged to less than $30 per barrel. Leveraging this, in sync with its past practice of mopping up the oil bonanza, the Modi government has yet again hiked central excise duty (CED) on petrol and diesel by Rs 3 per litre each—Rs 2 per litre by way of special excise duty (SED), and Rs 1 per litre in ‘road cess’—from March 14, 2020 to Rs 23 per litre for petrol, and Rs 19 per litre for diesel.
Faced with a shortfall of about Rs 2 lakh crore in tax collections vis-à-vis even the revised estimate (RE) of Rs 14 lakh crore for FY20 and, likely, a repeat of this scenario in FY21, the Centre is desperate to grab any opportunity available to garner additional revenue. Therefore, it has hiked the duty. The move does not inspire confidence.
With the move implemented when the end of the current fiscal is only two weeks away, the government will barely get Rs 2,000 crore—a drop in the ocean. In FY21, this will yield about Rs 39,000 crore. Post devolution to the states as per recommendation of the 15th Finance Commission—41%, applicable to 2/3rd of the additional revenue (accrual from hike in road cess is retained entirely by the Centre)—the Centre will be left with about Rs 28,500 crore (39,000 x 0.67 x 0.59+13,000). This is barely 7% of the Rs 3.75 lakh crore in tax revenue (over the likely actual for FY20) that it is targeting in FY21.
After the duty hike, the price of petrol (as on March 14) is about Rs 70 per litre in Delhi. This includes Rs 38 per litre on account of taxes; other price components viz. ex-refinery price to oil marketing companies (mainly IOCL, BPCL, and HPCL), freight charges, and dealer commission make up for Rs 32 per litre. In case of diesel, of the Rs 62 per litre that the consumer pays, taxes are Rs 28 per litre, even as other cost components account for Rs 34 per litre.
The Rs 38/litre tax on petrol includes the excise duty of about Rs 23/litre and VAT of Rs 15/litre (in Delhi, VAT is levied at 27%). The VAT component includes Rs 6.2/litre as state tax on excise duty (27% of `23) or the so-called ‘cascading’ effect. In case of diesel, the Rs 28/litre tax includes excise duty of Rs 19/litre and VAT (levied at 16.75%) of Rs 9/litre. Here, the cascading effect is Rs 3.2/litre.
Clearly, these fuels are heavily taxed with in-built cascading effect. Whereas on petrol, consumers shell out 54% of the price as tax, in case of diesel, this is 45%. Further, a higher proportion of the tax goes to the states. In case of petrol, CED of Rs 23/litre includes Rs 10/litre towards road cess. Post devolution to the states, the Centre will be left with Rs 17.7/litre (13 x 0.59+10) or 47% of total tax even as the state gets Rs 20.3/litre (13 x 0.41+15) or 53%.
In FY19, while the Centre mopped up Rs 2.58 lakh crore from the petroleum sector (Rs 2.14 lakh crore from excise duty alone), the states garnered Rs 2.27 lakh crore, of which, revenue from VAT alone was over Rs 2 lakh crore.
The Centre and states may have reason to rejoice, but this imposes prohibitive costs on the economy, contributing to high fuel price (even when crude price declines), high inflation, higher subsidy payments on fertilisers, food, irrigation, etc, and undermining the competitiveness of Indian goods in the international market. No wonder, a good slice of revenue from fuel taxes is offset by an increase in subsidy payments and revenue foregone from sectors where growth is constricted by high fuel price.
Yet, in their obsession to extract more, states have taken recourse to bizarre methods of taxing the fuel sector. Thus, even as Telangana charges high VAT (35.2%) on petrol, Uttar Pradesh (UP), which has a somewhat lower ad valorem rate of 26.8%, also has a ‘specific’ rate of Rs 16.74/litre, with a rider that the higher of the two will be applicable. This means that when international price drops, the specific rate is triggered, thereby protecting state’s revenue. West Bengal, Uttarakhand, Assam, Haryana, Himachal Pradesh, and Jharkhand have a similar taxation system as UP’s.
Often, there is talk of including petrol and diesel, besides crude oil, natural gas, and aviation turbine fuel (ATF), under the GST regime, with a view to lower the incidence of tax on these products. This is amusing.
Already, as per a 2016 Constitution Amendment Act, these products are included under GST, but zero rated, meaning that they continue to attract CED, VAT, and other local taxes. When will these levies be replaced by GST? This decision rests with GST Council, which has to decide on the date of transition to taxing fuel under GST, and the slab in which each product will be put.
The GST Council includes all states, and the Union finance minister. The decision is entirely in their hands; yet, if the switch-over has not happened even 33 months after the regime was launched, this signifies unwillingness to give up milching the cow (even if these are put under the highest tax slab of 28%, this will be significantly lower than the current incidence of over 50%).
In the present scenario of muted tax collection, and surge in resources required to deal with the economic crisis triggered by Covid-19, the government may not be keen to switch-over immediately. But, it can’t be postponed indefinitely. At some point, getting rid of the extant regime and placing petrol and diesel in the 18% tax slab under GST needs to be seriously considered.
( The author is a policy analyst. www.uttamgupta.com. Views are personal)