Modi Government Hikes Taxes On Petrol, Diesel Even As Crude Falls
A droplet of petrol falls from a refueling nozzle on the forecourt of a OAO Gazprom Neft PJSC gas station in Belgrade, Serbia. (Photographer: Oliver Bunic/Bloomberg)  

Modi Government Hikes Taxes On Petrol, Diesel Even As Crude Falls

India, the world's third-biggest oil consumer, has raised taxes on petrol and diesel even as crude oil posted its biggest weekly plunge since 2008.

Prime Minister Narendra Modi-led government has increased special additional excise duty and road and infrastructure cess on petrol and diesel by a total of Rs 3 per litre.

The price of petrol in Delhi stood at Rs 69.87 per litre, while diesel price was Rs 62.58 per litre, currently. The hike will be effective from today.

Special additional excise duty on petrol was hiked by Rs 2 to Rs 10 per litre, while the levy on diesel was doubled to Rs 4 per litre, the finance ministry said in a notification dated March 13.

Oil posted the biggest weekly plunge since 2008 as major producers prepare to drench the market with supply just as the coronavirus crushes demand. Losses for the week totaled 23 percent after the collapse of talks between members of the OPEC+ group triggered the biggest crash in a generation.

The increase in duty rates will provide much-needed resources for infrastructure, and other developmental items of expenditure keeping in view the present fiscal position, an Indian government official told BloombergQuint on the condition of anonymity.

He said the benefit of reduction of crude prices in the first quarter of the year was passed on to the consumer, and the government has hiked duty to raise some revenue given a tight fiscal situation.

The Modi government and the Reserve Bank of India have been trying to come up with a slew of policy measures to respond to a myriad of global and domestic risks threatening an economy in the grip of a prolonged slowdown.

According to the breakup on Indian Oil Corp.'s website, taxes contribute nearly 50 percent to the price of petrol at pumps in Delhi—nearly 28 percent central excise and about 22 percent value-added tax—as of March 1.

The Right Move?

"It seems the government wants to discount the savings to consumers and mop up its own treasury," said Sumit Lunker, partner at PwC India.

The increase in excise duty would in normal course result in a hike in petrol and diesel prices but most of it would be adjusted against the fall in rates that would have necessitated because of the slump in international oil prices.

According to Krishan Arora, a partner at Grant Thornton India LLP, there will be an immediate increase in net fuel price for consumers, which could adversely impact the already disrupted consumption pattern owing to the spread of coronavirus.

A complete pass-through would have given a lot of comfort to consumers, said Devendra Pant, chief economist at India Ratings.

By increasing excise duty government has limited the benefits which would have accrued to the consumers and would have acted as a consumption stimulus, he told BloombergQuint.

However, since government finances are not in very good shape, the increase in excise duty will give some comfort to the exchequer, Pant said.

A back of the envelope calculation suggests every Re 1 hike in excise duty on petrol and diesel boosts central government’s tax revenue by about Rs 14,000 crore.

If due to slowdown, consumption of fuel declines up to 15 percent, the equivalent increase in duties (excise+cess) will not have any impact on government revenues, Pant said.

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