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It’s a relief that the Union government has cut the fuel tax. But why were the prices increased in the first place and who was responsible for those increases? A look at the developments that preceded the recent excise duty cuts:
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After weeks of incremental increases in fuel prices, Union Finance Minister Nirmala Sitharaman announced that the Union government is slashing fuel taxes. In a tweet on May 21, she said that the central excise duty on petrol and diesel will be reduced by Rs. 8 and Rs. 6, respectively, which meant retail prices would drop by Rs. 9.5 and Rs. 7 per litre.
The news brings some consolation to people like Siva from Chennai, who was forced to ride share autorickshaws to work to cut costs. In fact the 39-year-old cashier working in a private hospital wanted the Tamil Nadu government to allow free travel for men too. For Hyderabad’s Razia Fatima, high fuel costs meant a cutback on non-essential travel. “There has not been any change in our salaries during the pandemic, so we have to do what we can to spend money wisely,” she said. For fishermen like Jomon from Kerala, fueling his boat cost more than the fish he caught.
What brought Siva, Razia, Jomon and us here?
In her announcement, Ms. Sithraman noted that the cost of the fuel cuts on the Union Government would be Rs. 1 lakh crore, and the entire burden of these revenue losses would be borne by the Centre. Her point was that the cut of Rs 8 per litre came from the Road and Infrastructure (RIC) component of the Union government’s excise duty, which is not shareable with States.
There are four components in the government’s excise duty: basic excise duty, which is shareable with the States; a special additional excise duty; an agriculture infrastructure and development cess (AIDC); and the RIC, which cannot be shared with the States.
The recent cut came entirely from the RIC, so State tax collection was unaffected, Ms. Sitharaman argued.
However, Tamil Nadu Finance Minister Dr. Palanivel Thiagarajan was quick to point out that this was not the case. “T.N. VAT is partly in Rs/litre & partly as % of price (13% petrol & 11% diesel) including Union taxes (including cess & surcharge). So Union cuts 1₹, our VAT goes down 13(P) & 11(D) paise,” he tweeted.
An analysis by The Hindu data team showed that he is right. States impose their taxes (VAT) in percentages, applied on the sum of the base price of the fuel, the dealer commission and the excise duty i.e. the Union government’s tax. If the Union government reduces its tax, States will consequently make less money.
For example, Delhi will lose Rs 0.83 of sales tax for every litre of petrol sold, after the recent excise duty cut. The table lists the petrol price build up in Delhi before and after the central excise duty cut on Saturday. The reduction in Delhi’s revenue would have been even higher, had the base price of petrol stayed put between these two dates.
So, no, the Union Government isn’t bearing the burden alone.
Now that the Union Government had cut taxes, Ms. Sitharaman said that it was once again, the State’s turn to do the same.
This isn’t the first time the Union government has accused States of contributing to high fuel costs. In April, Prime Minister Narendra Modi singled out Opposition-ruled States and pushed them to reduce their VAT.
Ministers of many States objected to the Union Government’s view. They argued that they hadn’t increased the VAT tax rate; rather it was the Centre which had increased the tax rate multiple times whenever crude prices fell.
An analysis of fuel tax rate changes done by both the States and the Union Government in the recent past revealed that many States such as Kerala, West Bengal and Telangana have not hiked up tax rates in the recent years while Maharashtra’s and Andhra Pradesh’s increases were nominal. Meanwhile, the Union government had increased it many times, many fold.
Also, if the changes are measured as a share of GDP, between FY15 and FY21, the Union government’s tax collections have increased from 0.79% of the GDP to 1.88% of the GDP. In the same period, States’ tax collections have marginally declined from 1.1% of GDP to 1.02% of GDP.
The graph below shows the Union government and State government’s tax share in Delhi’s retail prices over time. While the State’s share has remained flat, the Union government’s share rose by several points.
Such statements by the Union Government are not new. In fact, for a long time, it claimed that oil bonds were the reason for higher petrol prices.
The UPA government led by Dr Manmohan Singh handled petrol pricing differently. Earlier, the petrol prices were subsidised, so that spikes in global crude prices wouldn’t drastically impact people. Back then, fluctuations in retail prices were relatively minor, with much of the difference being paid off by the government to oil marketing companies, like Indian Oil.
When crude rates started to increase drastically post-2005, the UPA started to pay the OMCs via oil bonds. Simply put, since they could not immediately afford the subsidies, they issued bonds that acted as payment placeholders. While interest was paid on these bonds, the principal amount only needed to be paid when the bonds matured. Some matured after the BJP took over in 2014.
Repaying debts is never something a government wants to deal with. Last August, Ms. Sitharaman doubled down on the claim that the BJP was only cleaning up the UPA government’s mess, or as she called it, “trickery.”
“Oil bonds worth ₹1.44 lakh crore were issued by the UPA to show reduced oil prices in 2013. Who is paying for it, the Modi 2.0 government,” she said.
However, data show that the amount of interest paid on such oil bonds between FY15 and FY21 and the principal outstanding for the bonds and the interest payable between FY22 and FY26 put together formed around 2.28 lakh crore. That is just 15% of the Rs 15.6 lakh crore collected as central excise duty between FY15 and FY21.
The chart shows the revenue earned by the Centre through excise duty and State’s VAT tax on petrol and petroleum products. The Centre’s revenue rose sharply in FY2021 after the hike in excise duty. As a result, the Centre collected ₹3.7 lakh crore just in FY21 despite the sharp decrease in petrol consumption that year due to movement restrictions. In contrast, the State’s tax collections have remained muted.
So, the Union government has derived nearly seven times higher returns from excise duty and other levies than the expenditure it has so far incurred in relation to the bonds.
But there’s more.
In February 2021, Ms. Sitharaman said, “the oil prices have been freed and the government has no control over it.”
However, this argument would hold true if all we were paying for was for the oil i.e. the base price. But the retail petrol price consists of the dealer commission, the State tax and the Union government’s excise duty over the base price of oil. So even if the government really can’t do anything about international crude prices (which decides the base price), it can still tinker with taxes.
The graph below shows that whenever the crude prices crashed, the government increased the excise duty in proportion to the drop, disconnecting the trends in crude and retail prices. Whenever the crude prices increased, the retail prices increased too.
So, the government did have a handle on the retail fuel price.
On the same day, the Minister also said that it is for the oil marketing companies to decide whether they can cut the prices. This claim was later echoed by Union Petroleum and Natural Gas Minister Hardeep Singh Puri. He said oil companies would decide prices, when asked what impact the crisis would have on India.
However, after the first central excise duty cut in November 2021, for 137 days, the retail prices remained unmoved given the elections in five States: U.P., Punjab, Goa, Manipur and Uttarakhand. A similar freeze could also be seen before State polls in Assam, Kerala, Puducherry, T.N. and W.B in 2022. Notably, during this period, the crude prices increased by over 50% to which the OMCs did not react.
You can clearly see that the price of oil plateaued during election season in states like Bihar, Uttar Pradesh and Punjab.
So, the government does have a hold over the OMCs.
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