To rein in the inflationary pressure, on May 21, 2022, Modi – government announced reduction in in the central excise duty (CED) on petrol and diesel by Rs 8 per litre and Rs 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 Rs 9.8 per liter and on diesel Rs 3.8 per liter. By March, 2020 (this was when Covid – 19 pandemic struck), already the government had hiked these to Rs 20 per liter on petrol and Rs 16 per liter on diesel. During 2020, it was further increased on petrol by Rs 13 per liter (Rs 3/- in March and Rs 10/- in May) and on diesel by Rs 16 per liter (Rs 3/- in March and Rs 13/- in May). Thus, by May 2020, it had peaked to Rs 33 per liter on petrol and Rs 32 per liter on diesel.
On November 3, 2021, the government reduced CED on petrol Rs 5 per liter and on diesel Rs 10 per liter. Thereafter, within a little over six month, on May 21, 2022, it has now further reduced the duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre. Put together, the cuts add up to Rs 13 per liter on petrol and Rs 16 per liter on diesel. Today, the CED is Rs 20 per liter on petrol and Rs 16 per liter on diesel.
The duty on petrol and diesel has thus been restored to the level these were before the 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.
The 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 Rs 400,000 crore less than the target. This was despite the Centre garnering more from hike in fuel taxes. Sans it, its fiscal health would have been even worse jeopardize 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 Rs 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, even at current level, the taxes continue to be unreasonable high.
In Delhi, the pump price of around Rs 97 per litre (as on May 22, 2022) includes ex-refinery price (ERP) Rs 50/- plus freight Rs 7/- or Rs 57/- (ready to send to Petol Pump), dealer commission Rs 4/-, CED, Rs 20/-and VAT (value added tax) @19.4 percent, Rs 16/-.
The tax component (CED plus VAT) alone is Rs 36 per liter which works out to 70 percent of the ERP i.e. Rs 50/-. Of this, 40 percent (20/50) is collected by the Centre and 30 percent (16/50) goes to the State (Delhi). In Mumbai, where VAT is much higher at Rs 30 per liter (inflating pump price to Rs 111 per liter), the tax component is Rs 50 per liter or 100 percent of ERP – 40 percent going to the Centre and 60 percent to the State.
Even the tax rate of 70 percent at the lower end (in Delhi) is two-and-a-half times the highest slab of 28 percent 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 GST Council decides to take a call on taxing them under the new regime.
While, almost every political party from 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 realize the quantum of revenue they will have to forego under such a scenario?
In a discussion with economists and industry experts last year on ‘transition of energy products into the GST’, NITI Aayog had proposed to tax them @28 percent. As per this proposal, the Centre and states will get to collect 14 percent 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 1/4th (14/60) of what it is collecting now.
The highest tax slab of 28 percent is meant for demerit goods such as tobacco, drinks etc. 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 percent (12 percent is even more desirable). But, the Centre/states would start wobbling at the very idea.
The challenge of high international prices is no less daunting. Already, at the current pump price (Rs 97 per liter in Delhi), oil marketing PSUs are having an under-recovery of Rs 13 per liter. Against the current crude price of US$ 115 per barrel for the Indian basket, the price used in calculation of the ERP (Rs 50 per liter) is US$ 90 per barrel. Had the current price been used, the ERP would have been Rs 63 per litre – Rs 13/- higher.
Meanwhile, continuation of the Ukraine war, increasing intensity of economic sanctions by EU/USA on Russia and decision by EU countries to slash their dependence on Russian oil and gas by 90 percent by the end 2022 will ensure that the international crude price will be on an escalating trajectory. Considering that India depends on imports for 83.5 percent of its crude requirements, there is little that the government can do to escape its onslaught.
In this backdrop, the only way to give relief to consumers is by more cut in taxes. For now, in view of the Centre having already done its bit, the 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 percent each so that at the end, these can be taxed under GST @28 percent including CGST 14 percent and SGST 14 percent.
For the long-term, India should focus on promoting self-reliance in oil production to combat its inherent vulnerability to escalating international prices.