Within a couple of months of beginning his first term, Modi was conferred with oil bonanza. The international price of crude oil [India depends on import for meeting over 80% of its requirement] had moved on a downward trajectory from a peak of US$ 117 per barrel in November 2014 to US$ 28 per barrel in January 2016. The government mopped up a major slice of this reduction by increasing the central excise duty [CED] on petrol from Rs 9.8 per litre to Rs 21.5 per litre and on diesel from Rs 3.8 per litre to Rs 17.3 per litre [the hike was given effect to in as many as 9 rounds].
After January 2016, the crude price increased gradually to touch a little over US$ 40 per barrel by that year end. During 2017 however, the pace of increase accelerated to touch US$ 60 per barrel in October 2017. This led to corresponding increase in the price of these fuels even as the duty remained unchanged. Amidst mounting opposition, the government was forced to cut CED by Rs 2 per litre each on petrol and diesel to Rs 19.5 per litre and Rs 15.3 per litre respectively.
During 2018, the crude continued to move up reaching a peak of a little over US$ 80 per barrel in October, 2018. This prompted lowering of duty on petrol to around Rs 18 per litre and on diesel to Rs 14 per litre. In the following year, even as crude price slid to around US$ 60 per barrel [by the end of 2019], in the budget for 2019-20, CED was increased by Rs 2 per litre each Rs 20 per litre on petrol and Rs 16 per litre on diesel.
In the wake of widespread destruction of demand triggered by Covid – 19, failure of OPEC and non-OPEC suppliers agree to production cut and the two front-line exporters viz. Saudi Arabia and Russia vying with each other to capture the ever shrinking market, the crude has plunged to less than US$ 30 per barrel. Leveraging this, the centre has again hiked CED on two fuels by Rs 3 per litre each [Rs 2 per litre by way of Special excise duty (SED) and Rs 1 per liter in road cess] from March 14, 2020 to Rs 23 per litre petrol and Rs 19 per litre diesel.
In the backdrop of the government facing a huge shortfall of about Rs 200,000 crore in the tax collection vis-à-vis even the revised estimate [RE] of Rs 1400,000 crore for 2019-20 [when compared to the budget estimate, the shortfall is much higher at Rs 400,000 crore] and likely huge shortfall even during 2020-21, Team Modi is desperate to grab whatever opportunity available to garner additional revenue. Therefore, it has hiked the duty. The move is imprudent, be it on revenue or on economic consideration.
During the current year, with two weeks left, it will barely get Rs 2000 crore which is a drop in the ocean. During 2020-21, this will yield about Rs 39,000 crore. Post-devolution to the states as per recommendation of the 15th Finance Commission or 41% applicable only to 2/3rd of the additional revenue [as accrual from hike in road cess is retained entirely by the union government], the centre will be left with about Rs 28,500 crore [39,000×0.67×0.59+13,000]. This is barely 7% of the increase of Rs 375,000 crore in tax revenue [over the likely actual for 2019-20], it is looking for during 2020-21.
From an economic perspective, let us look at the price of these fuels in Delhi. After the duty hike, the current price of petrol [as on March 14] is about Rs 70 per litre. This includes Rs 38 per litre on account of taxes while other price components viz. ex-refinery price to oil marketing companies [mainly Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL)], freight charges and dealer commission, make up the remaining Rs 32 per litre. In case of diesel, out of Rs 62 per litre that consumer pays, the taxes are Rs 28 per litre even as other cost components account for the balance Rs 34 per litre.
The Rs 38 per litre tax on petrol includes the excise duty of about Rs 23 per litre and VAT [value added tax] Rs 15 per litre [in Delhi, VAT is levied @27%]. Pertinently, the VAT component of Rs 15 per litre includes Rs 6.2 per litre as the element of state tax on excise duty [27% of 23] or the so called ‘cascading’ effect. In case of diesel, the Rs 28 per litre tax includes excise duty of Rs 19 per litre and VAT Rs 9 per litre [@16.75%]. The state tax on excise duty or the cascading effect works out to Rs 3.2 per litre.
The above numbers point towards unusually high taxation of these fuels. Whereas, on petrol, consumers shell out 54% of the price as tax, in case of diesel, this is 45% [minus the tax component, they would be paying just Rs 32 per litre for petrol and Rs 34 per litre for diesel]. Further, a higher proportion of the tax goes to the states. In case of petrol, CED of Rs 23 per litre includes Rs 10 per litre towards road cess. Post-devolution to the states, the centre will be left with Rs 17.7 per litre [(13×0.59)+10] even as the state will get Rs 20.3 per litre [(13×0.41)+15] or 53% of total tax.
The high rates are reflected in the tax collection of both the centre and states. During 2018-19, while, the centre mopped up Rs 258,000 crore from the petroleum sector [Rs 214,000 crore from excise duty alone], the states garnered Rs 227,000 crore of which collection from VAT alone was over Rs 200,000 crore.
The high tax rates may yield good revenue for the government but these impose prohibitive cost on the economy. These contribute to high fuel price [even when crude price declines], in turn, high inflation, higher subsidy payments on fertilizers, food, irrigation etc, stress on profit margins of industries and services across the board and undermine the competitiveness of Indian goods in the international market. No wonder, a good slice of tax revenue from oil products is offset by increase in subsidy payments and revenue foregone from sectors whose growth is hampered by high fuel price.
Yet, in their obsession to extract more and more, states have taken recourse to bizarre methods of taxing the fuel sector. Thus, even as Telangana charges high VAT @35.20% on petrol, Uttar Pradesh [UP] which has somewhat lower ad valorem rate of 26.80% also has a fixed rate Rs 16.74 per litre with a rider that higher of the two will be applicable. This means that when international price drops, the specific rate will be are triggered thereby protecting state’s revenue. West Bengal, Uttarakhand, Assam, Haryana, Himachal Pradesh and Jharkhand have a similar taxation system as UP.
Often, there is talk of including petrol, diesel [besides crude oil, natural gas and aviation turbine fuel (ATF)] under Goods and Services Tax [GST] regime with a view to lower the incidence of tax on these products. This is amusing.
Under the constitution amendment Act [2016], these products are included under GST. But, these are ‘zero’ rated. It means that they continue to be governed by the erstwhile dispensation of levying CED, VAT and other local taxes. When will these levies be replaced by GST? This decision vests with the GST Council – the body created vide the amendment act – which will determine the date of transition to rating under GST and the category under which each of these products will be put for levy of tax.
The GST Council includes all states besides the union finance minister. The decision is entirely in their hands and yet if the switch-over has not happened even 33 months after launch [July 1, 2017], this has to do with their unwillingness to give up the milch 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% currently].
In the present scenario of muted tax collection which will be exacerbated during 2020-21 [courtesy, widespread devastation caused by Covid – 19], the government may not be keen to switch-over; however, after the crisis situation is over, it needs to seriously consider getting rid off the extant atrocious regime by replacing it with GST @28% to begin with and gradually lower to 18%.