Centre can’t afford to cut taxes on something as remunerative as fuel

With petrol and diesel prices hitting record levels over the past few days, calls from industry chambers and consumers for the government to cut its excise duty rates on fuel have become all the more strident. However, the Centre has so far held off on pulling that trigger, which is an unusual stance in the run up to the general elections. One major reason why a government would hold off on such a popular move is that it simply cannot afford it.

According to the Petroleum Planning and Analysis Cell (PPAC), the Centre earned ₹2,42,691 crore from excise duties on fuel in 2016-17. That year works best as a reference because it is the most recent year in which excise duty rates remained unchanged throughout.

At the time, the excise duty rate on petrol was ₹21.48 and on diesel ₹17.33 per litre. The government has unofficially estimated the revenue loss of a ₹1 cut in excise duties on fuel at ₹13,000 crore, while back-of-the-envelope calculations by The Hindu peg this at anywhere between ₹11,000 crore and ₹14,000 crore.

The government said it earned ₹7.41 lakh crore from GST in the nine months of its implementation till March 31, 2018. That’s an average of about ₹82,000 crore a month. Most analysts say that this amount should have been consistently ₹1 lakh crore a month. April 2018 did see GST collections exceeding that mark, but even the government said that the figure should not be used to predict a trend.

Falling short

So, given that GST collections have on an average fallen short by ₹18,000 crore a month, it’s fair to assume that the Centre cannot afford to further reduce its indirect tax collections by cutting excise duties on something as remunerative as fuel.

Meeting the fiscal deficit targets would become all the more difficult if the Centre commits to such a revenue loss. It did try recently to mitigate the GST under-performance, but only managed partial success. In Budget 2018, it reduced the excise duty on fuel by ₹8 per litre, but introduced an equal road cess, leaving retail prices unchanged. However, the difference here is key. While taxes such as excise duties have to be shared with States — 42% goes to the States, to be exact — cesses can stay entirely with the Centre.

With such a move, the Centre saved ₹8,500 crore a month that would otherwise have been shared with the States. But this still isn’t enough to bring it to pre-GST collections. Rather, the State governments can swoop in and save the day for consumers. According to the PPAC, State governments together collected ₹1,66,378 crore as sales tax/VAT on petroleum products. The rates of these taxes can be as high as 39.78% in Mumbai and 36.06% in Andhra Pradesh.

Given that the States cannot complain about any revenue lost due to GST since the Centre has promised to make up for any shortfall for five years, they are the ones that can take a revenue hit to benefit the consumers.

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Printable version | Oct 24, 2021 9:01:13 PM |

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