It would be fair to keep the fuel tax rates in a lower slab, say, 18 per cent, but the Centre and States would start wobbling at the very idea
To rein in the inflationary pressure, on May 21, 2022, the Narendra Modi Government announced reduction in the central excise duty (CED) on petrol and diesel by `8 per litre and `6 per litre, respectively. The cuts are significant but, given the magnitude of the challenge, these won’t be enough. Let us do a fact check.
In May 2014 (when Modi took charge), CED on petrol was `9.8 per liter and on diesel `3.8 per liter. By March, 2020 (this was when the Covid-19 pandemic struck), already the Government had hiked these to `20 per liter on petrol and `16 per liter on diesel. During 2020, it was further increased on petrol by Rs 13 per liter (`3 in March and `10 in May) and on diesel by `16 per liter (`3 in March and `13 in May). Thus, by May 2020, it had peaked to `33 per liter on petrol and Rs 32 per liter on diesel.
On November 3, 2021, the Government reduced CED on petrol `5 per liter and on diesel `10 per liter. Thereafter, within a little over six month, on May 21, 2022, it has now further reduced the duty on petrol by `8 per litre and on diesel by `6 per litre. Put together, the cuts add up to `13 per liter on petrol and `16 per liter on diesel.
Today, the CED is `20 per liter on petrol and `16 per liter on diesel.
The duty on petrol and diesel has thus been restored to the level these were before Covid-19 struck. Critics may argue that consumers have only been given relief from the extra burden imposed by the Centre two years ago, that it has done no favor. It all depends on the way one looks at things. Someone with a positive mindset will definitely like to see the glass half full.
FY 2020-21 was an unprecedented year when most of the economic activities had come to a grinding halt, severely impacting the tax revenue. As a result, gross tax receipts (GTR) were `400,000 crore less than the target. This was despite the Centre garnering more from hike in fuel taxes. Without it, its fiscal health would have been even worse, jeopardising development and welfare schemes.
During 2021-22, with the impact of pandemic diminishing substantially and the economy gaining traction, GTR were higher than even the revised estimate (RE) by `200,000 crore. The buoyancy in tax revenue is likely to continue during the current year as well. Therefore, the cushion from higher fuel taxes won’t be needed. But, the big picture is that, even at the current level, the taxes continue to be unreasonable high.
In Delhi, the pump price of around `97 per litre (as on May 22, 2022) includes ex-refinery price (ERP) `50 plus freight `7 or `57 (ready to send to petrol pump), dealer commission `4, CED `20 and value added tax (VAT) @19.4 percent or `16.
The tax component (CED plus VAT) alone is `36 per liter which works out to 70 per cent of the ERP, i.e. `50. Of this, 40 per cent (20/50) is collected by the Centre and 30 per cent (16/50) by the state (Delhi). In Mumbai, where VAT is much higher at ` 30 per liter (inflating pump price to `111 per liter), the tax component is `50 per liter or 100 per cent of ERP—40 per cent going to the Centre and 60 per cent to the state.
Even the tax rate of 70 per cent at the lower end (in Delhi) is substantially higher than the highest slab of 28 per cent under the goods and services tax (GST).
As per the 2016 Constitution Amendment (GST was introduced through this amendment) Act, petrol and diesel—besides crude oil, natural gas, ATF, electricity—are included under GST, but zero rated, meaning that the Centre and States can continue to collect CED/VAT (and other local taxes) till such time the GST Council decides to take a call on taxing them under the new regime.
While almost every political party from the non-BJP ruled states is prompt in asking the Centre to tax these fuels under GST—ostensibly to lower their price to the consumers—do they realise the quantum of revenue they will have to forego in such a scenario?
In a discussion with economists and industry experts last year on ‘transition of energy products into the GST,’ the NITI Aayog had proposed to tax them @28 per cent. As per this proposal, the Centre and states will get to collect 14 per cent each as CGST (central GST) and SGST (State GST), respectively. In Delhi, the State will end up reducing its collection to less than half of the present level, whereas for the Centre the cut will be steeper to almost one-third. A state like Maharashtra will have to make an steeper climb down to less than 1/4 th (14/60) of what it is collecting now.
The highest tax slab of 28 per cent is meant for demerit goods such as tobacco and alcohol. Petrol and diesel being items of mass consumption (diesel being used for movement of goods, a higher tax on it has a much wider impact including the poorest) can’t be treated likewise. Therefore, it would be fair to keep them in a lower slab, say, 18 per cent (12 per cent is even more desirable). But the Centre and States would start wobbling at the very idea.
The challenge of high international prices is no less daunting. Already, at the current pump price (`97 per liter in Delhi), oil marketing PSUs are having an under-recovery of `13 per liter. Against the current crude price of $115 per barrel for the Indian basket, the ERP of `50 per liter is calculated with reference to a crude benchmark of $90 per barrel. Had the current price been used, the ERP would have been `63 per litre, or `13 higher.
Meanwhile, continuation of the Ukraine war, increasing intensity of economic sanctions by the EU and the US on Russia, and the decision by EU countries to slash their dependence on Russian oil and gas by 90 per cent by the end of 2022 will ensure that the international crude price will remain on an escalating trajectory. Considering that India depends on imports for 83.5 per cent of its crude requirements, there is little that the Government can do to escape its onslaught.
Against this backdrop, the only way to give relief to consumers is by more cuts in taxes. For now, in view of the Centre having already done its bit, states (especially those who didn’t oblige even in November 2021) need to offer significant reduction in VAT (for instance, Maharashtra can straight away go for a cut of Rs 10 per liter).
Over the next three years or so, the Centre and states should aim at reducing their tax rates closer to 15 per cent each so that at the end, these can be taxed under GST @28 per cent including CGST 14 per cent and SGST 14 per cent.
For the long-term, India should focus on promoting self-reliance in oil production to combat its inherent vulnerability to escalating international prices.
(The writer is a policy analyst. The views expressed are personal.)
https://www.dailypioneer.com/2022/columnists/fuel-tax-cuts–easier-said-than-done.html
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