Rising petrol and diesel prices are having a deleterious effect on the disposable income of consumers. In Delhi, the price of petrol is Rs 78.43 per litre, and diesel stands at Rs 69.31, while it is Rs 86.24 per litre for petrol in Mumbai.
The worst affected are the poor and middle class, who subsist on fixed budgets. The inflationary pressure created by rising fuel prices for more than 15 consecutive days has the consumer asking one question: can the government reduce petrol and diesel prices?
The answer, according to experts, is an emphatic ‘yes’.
On Monday, Rajiv Kumar, the NITI Aayog vice chairperson argued that both the State and Centre can reduce value-added tax (VAT) and excise duty on petrol and diesel respectively.
As per some reports, for every litre of petrol, both the Centre and State governments charge an over 50% tax in India, which is among the highest in the world.
“A price rise in oil does work like a tax on the economy because it cuts into disposable incomes and it also acts as a cost-push as it entrenches inflationary expectations,” he told NDTV. “I don’t think we should wait much longer to see the price trends; the government has to act.”
“We are (also) getting into the sowing season, and farmers would be using a lot more diesel, so it is useful for the cost of production in the agriculture sector not to be rising at this time,” he adds.
However, the greater onus on reducing taxes, he argues, is on the State governments, although he doesn’t let the Centre off the hook. He claims that every Re 1 decrease in excise duty could result in a loss of Rs 13,000 crore in tax revenue for the Centre, although it’s incumbent on them find other sources revenue to make up for this potential loss. It is consumer interest that is at stake here.
From November 2014 to January 2016, the Centre raised excise duty nine times amounting to Rs 11.77 per litre on petrol and Rs 13.47 on diesel to shore up its finances, but only directed a one time Rs 2 per litre cut in October 2017. For the consumer, the effects of raising excise duty when international crude oil (India imports 80% of its crude oil) prices are low at $45 per barrel isn’t as bad as when it spikes up to $75 per barrel today, as per latest figures.
According to the Press Trust of India, however, the Ministry of Finance isn’t too keen on reducing excise duty even though Kumar has argued that the Centre could take a hit on excise revenue since it’s on the path of “improving tax buoyancy and registrations under the GST net.”
As argued earlier, the onus is on the State government, since they impose taxes on a percentage (ad valorem) basis. “On an average, states now impose 27% tax on petroleum products, this should surely be brought down 3-4% points,” said Kumar to the publication, adding, “That would not still cut into their fiscal balance.”
In other words, States can take these hits in revenue.
Even a recent State Bank of India report made the same case. In its Ecowrap report, SBI argued that States can slash petrol prices by Rs 2.65 per litre and diesel by Rs 3 per litre if they choose to give up potential windfall into their coffers gained out of high crude oil prices.
“Our analysis shows that at the current crude prices and extending our analysis to 19 states (overall consumption share is 93 percent), the states could have gained at least an additional Rs 18,728 crore of revenue (in 2018-19),” said SBI’s Ecowrap report.
It goes onto add that for every $1/barrel rise in crude prices, the states earn an additional revenue of Rs 2,675 crore above budget estimates. “Given that this revenue, if foregone, will not impact states fiscal position, we estimate that on an average, states can cut petrol prices by Rs 2.65/litre and diesel by Rs 2/litre, if the entire revenue gain was to be neutralised. This is the most plausible scenario under the current circumstances,” the report said.
Also Read: Petrol, Diesel Prices Highest Since 2014: Here’s How Fuel Is Priced in India
To gauge how much VAT the State governments charge, one only has to go by a recent Factly report. “State VAT on petrol is at least 25% in 20 states with the highest in Mumbai at 39.78%. The State VAT on diesel is more than 20% in 12 states and highest of 28.47% in Andhra Pradesh.”
Finally, many experts, opposition party members and even Kumar have advocated that fuel products should be brought under the goods and services tax net, although the Centre would face a lot of stiff opposition from the states. Like liquor, taxes on petroleum is a major source of revenue.
Fortunately, for the consumer, the price of crude oil has fallen in the last few days, dispelling fears to some extent that it would spike up to above $100 per barrel. However, as these experts argue, the Centre and State governments can offer relief to the consumer if they so desire.
(Edited by Gayatri Mishra)