Government Rules Out Excise Duty Cut As Fuel Prices Hit Fresh High
A cut in taxes on petrol and diesel has been ruled out for now as neither the central government nor some states have the appetite to stomach revenue loss from such a move, a top government official said today.
While a cut in excise duty that the central government levies will impact fiscal deficit— expenditure higher than income—states like Bihar, Kerala, and Punjab are not in a position to cut sales tax (or VAT), the official said, requesting anonymity.
The government, he said, anticipates that international oil prices, which along with a drop in the rupee value have been driving the fuel price rise to record levels, will moderate in coming days to take pressure off.
The comments come on a day when the opposition parties held nationwide protests against record high petrol and diesel prices. Prices in Delhi, where rates are the cheapest among all metros and most state capitals because of lower VAT, touched an all-time high of Rs 80.73 per litre today, while diesel climbed to its new high of Rs 72.83 a litre.
While Rajasthan on Sunday announced a 4 percent cut in VAT on petrol and diesel, Andhra Pradesh today said that fuel prices will be reduced by Rs 2 each.
“A cut in oil taxes will add to the fiscal deficit. National fiscal deficit determines bond yield and with a higher fiscal deficit the rupee becomes shakier,” the official said. “Then (as a result of cut in taxes) you have to make budget cuts in developmental expenditure. This is the real consequence of oil tax cut.”
He said the government’s ability to give relief was only when its finances are strong. “States do not have the capacity to reduce rates,” he said.
A one rupee per litre cut in taxes would result in revenues being hit by Rs 30,000 crore on an annualised basis.
“Oil prices disturb your current account deficit,” he said, adding oil companies will not be asked to take a hit for now as users should pay for the utility they use. “We will be able to lower taxes when we are able to increase compliance on income tax and the goods and services tax. Till then dependence on oil will continue.”
Current account deficit is the difference between inflow and outflow of foreign currency
Fuel rates have been on fire since mid-August, rising almost every day due to a drop in rupee value and rise in crude oil rates. Petrol price has risen by Rs 3.65 per litre and diesel by Rs 4.06 per litre—the highest in any month since the launch of daily price revision in mid-June last year.
The official said every state collects value added tax and also gets 42 percent of what the centre collects. “Our analysis shows that crude oil prices do not move in a straight line. Some months it goes up and some months it comes down,” he said. “Bringing oil in GST is not a solution. The only way taxes on oil can be brought down is by increasing non-political tax-GDP ratio.”
The tax ratio can be raised not by increasing rates but by bringing evaders and non-filers in tax net. “2007 was the only year when we saw an increase in tax-GDP ratio. 2008-2014 it was static.”
From 2014-18, there was an increase of 1.5 per cent in tax-GDP ratio. Of this, 50 percent is non-oil and 50 percent is oil. In the next five-six years, the target should be to increase non-oil tax to GDP ratio by at least 1.5 percent and this is the long-term solution, he said.
In countries which are tax-compliant, oil is taxed at a rate which is less than that in India. “If we expand the tax base in the same proportion as we did last year then non-oil GDP ratio will go up,” he said.
Giving an example, the official said if petrol is at Rs 83, then Rs 20 goes to states as taxes plus Rs 10 from centre’s devolution. So, states get Rs 30 out of the Rs 42 collected as taxes. Also, states levy VAT and this has increased their profits. The extra benefit accrued to states is Rs 3-4 a litre, he said.
Almost half of the fuel price is made up of taxes. The centre levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. On top of this, states levy VAT—the lowest being in Andaman and Nicobar Islands where a 6 percent sales tax is charged on both the fuel.
Mumbai has the highest VAT of 39.12 percent on petrol, while Telangana levies the highest VAT of 26 percent on diesel. Delhi charges a VAT of 27 percent on petrol and 17.24 percent on diesel.
The central government had raised excise duty on petrol by Rs 11.77 per litre and that on diesel by Rs 13.47 per litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 per litre.
This led to its excise collections from petro goods more than double in the last four years—from Rs 99,184 crore in 2014-15 to Rs 2.29 lakh crore in 2017-18. States saw their VAT revenue from petro goods rise from Rs 1.37 lakh crore in 2014-15 to Rs 1.84 lakh crore in 2017-18.
“We have given income tax relief to the tune of Rs 98,000 crore and also Rs 80,000 crore on account of GST rate cuts on 334 commodities,” the official said. “The effect of this benefit has kept inflation under control despite rise in fuel prices. Inflation was 4.1 percent in Vajpayee government, 5.8 percent in UPA-1, 10.4 percent in UPA-2 and in the current NDA, it is around 4.5 percent average.”
The official said the four states which have supported the Bharat Bandh collect high taxes themselves. Andhra Pradesh gets Rs 22.15 per litre on petrol and Rs 16.87 on diesel. Karnataka gets Rs 18.88 on petrol, Rs 12.23 on diesel, Kerala Rs 19.09 on petrol and Rs 14.51 on diesel and Punjab gets Rs 21.81 per litre in taxes on petrol and Rs 10.07 a litre on diesel.
In an election year, the spending cut is not an option, the official said, reasoning that it would hamper the government’s spending on development schemes.