Opening a window to increase excise duty on fuel, the government has raised the cap on special additional excise duty on petrol and diesel to Rs 18 and Rs 12 per litre, respectively, as per amendments in the Finance Bill passed in Parliament Monday. Last year’s Finance Act had put the cap at Rs 10 per litre for petrol and Rs 4 per litre for diesel.
The change in the cap will enable the government to raise duties on petrol and diesel by another Rs 8 per litre each.
Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually. The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer. But there is expected to be a demand slowdown for fuels with a nearly countrywide lockdown in the wake of coronavirus. With airlines, railways, trucks and passenger cars going off the roads, petrol, diesel and ATF (aviation turbine fuel) consumption is expected to fall drastically.
Why this opens a window
Raising the cap on special additional excise duty will enable the government raise resources at a time when tax and non-tax revenues are falling. This will provide the government some fiscal cushion to provide a much needed stimulus.
On March 14, the government had increased the excise duty on petrol and diesel by Rs 3 a litre each. An additional Re 1 per litre was also levied on both petrol and diesel under the road and infrastructure cess (RIC). The excise duties on petrol and diesel include basic excise duty, special additional excise duty, and road and infrastructure cess, which is levied as additional excise duty.
Central and state taxes account for 54 per cent of the price of petrol and 45 per cent of the price in Delhi after the hike. The government is increasing duties on petrol and diesel to raise revenues in view of the tight fiscal situation.
The slump in global crude oil prices, alongside the possibility of a global economic recession, has forced the government to look at avenues to raise revenues to support growth.
With major companies going for production shutdowns, industry players have suggested that the government boost fiscal stimulus in the wake of the demand collapse triggered by the coronavirus. Experts say the move to give headroom to the government to shore up its falling revenues may still not be enough to compensate for the fall in demand due to the virus outbreak.
Sunil Kumar Sinha, principal economist at India Ratings, said that even if the government allowed fuel prices to fall further along with global prices, an increase in demand would be unlikely given the restrictions on movement and lockdowns around the country.
“The consumption of both diesel and petrol will go down and this situation is unlikely to change over the next 15 day or a month,” Sinha said, adding that due to the outbreak the government was in a situation where it will have to increase spending on areas like policing and healthcare while its revenues fall because of the pandemic. “An increase in the special additional duty may not even compensate for the loss in revenue because of lower demand at this time,” he said.
Sinha said the government had followed a similar pattern when oil prices crashed in October 2014 . “The government used the opportunity to remove subsidy on diesel and appropriated a part of the benefit of the decline in prices because at that time too, the fiscal situation was not good and growth had fallen,” he said, adding that the government did not deny the consumers the benefit of the fall in prices but took the opportunity to shore up its finances.
Indranil Pan, group economist at IDFC First Bank, concurred that the government may have to spend more at a time when overall revenues were falling, and may need the flexibility offered by this move.
“The government doesn’t have too many levers as, on the one side, healthcare costs could be rising, and on the other side, your overall revenues may fall because of the slowdown,” Pan said, adding that this situation is the reason that they have given themselves the flexibility of raising the special additional excise duty.
Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand at a meeting of petroleum exporting countries.
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