Time for Centre/states to cut taxes on petrol and diesel

By: |
February 23, 2021 6:00 AM

More than two-thirds of the price of petrol is made up of these taxes, and it is slightly lower in the case of diesel

dieselFuel sales in India took a hit in March last year as the government imposed a nationwide lockdown to curb the spread of the novel coronavirus.

With petrol prices coming close to Rs 100 a litre in cities like Mumbai and all set to cross this with oil prices hardening across the world, there is an urgent need for both the central and state governments to revisit their taxation strategies in the oil sector. Most blame only the central government for its high taxes, but the blame must be shared—though, to a lesser extent—by the state governments as well. Thanks to the opportunity afforded by the collapse in crude oil prices early in the Narendra Modi government’s first tenure, excise duties were hiked sharply; the consumer resistance was muted since retail prices also fell a bit, but the cut was far lower than it would have been if the central government had not jacked up excise duties.

As a result of the hike in excise duties on petrol and diesel, the share of all oil duties rose from 10.1% of all central government tax collections—including income and corporate taxes–in FY15 to 14.3% in FY20. While central tax collections from the oil sector rose 2.3 times during this period—from Rs 126,025 crore to Rs 287,540 crore, according to data from the Petroleum Planning and Analysis Cell (PPAC)–state-level collections rose 1.4 times, from Rs 160,526 crore to Rs 220,841 crore.

As a share of the retail price for petrol in Delhi, for instance, PPAC data for February 16 shows the ex-refinery price—and this includes import duties on crude oil as well—was just 36% of the retail price, the rest was either central or state taxes (dealer commissions add up to around four percent of the retail price); the corresponding number was 42% in the case of diesel. The number differs from state to state, but central excise duties accounted for 37% of the retail price for petrol in Delhi, while the state government VAT accounted for 23%. VAT rates for petrol in Mumbai are higher than those in Delhi by around seven rupees per litre.

Since the central government has converted its ad valorem duties to a specific one, it now gets Rs 32.9 per litre of petrol irrespective of its price; the state government, on the other hand, will get higher VAT revenues each time the price of petrol rises in the international markets since the rates are levied on an ad valorem basis.

At a time when the government—both at the Centre as well as at the level of the states—is trying to stimulate demand from its post-Covid lows, taking away close to `5 lakh crore every year by way of central and state excise duties is the surest way of ensuring private consumption demand remains muted.

It is true that both the Centre and the states need these tax collections to shore up their budgets, but surely both need to make more efforts to boost revenues from other sources, including non-tax ones; at the level of the central government, keep in mind, the tax-to-GDP ratio has remained more or less flat; this was 10% in FY15, and stood at 9.9% in FY20.

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