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Explained: For state governments, why cutting taxes on fuel is easier said than done

The reluctance to reduce excise duty and VAT on fuel stems from the fact that it constitutes an important source of revenue for both the Union government and the states.

Written by Aanchal Magazine , Karunjit Singh | New Delhi |
Updated: April 28, 2022 10:21:12 am
fuel prices, petrol price, diesel price, petrol price today, fuel price hike, Modi on fuel price, Indian ExpressA worker fills petrol for two-wheelers at a fuel station in Ahmedabad. Express Photo by Nirmal Harindran

Amid soaring fuel prices in November 2021, the Centre went for the first cut in Central excise duties on petrol and diesel in over three years. This was followed by a cut in Value Added Tax (VAT) by many states. But the relief from the cuts in excise duty and VAT was outweighed by a series of 14 price hikes in 16 days for fuel, which started after lifting of the 137-day freeze post state elections in March this year.

The reluctance to reduce excise duty and VAT on fuel stems from the fact that it constitutes an important source of revenue for both the Union government and the states. Excise duty on fuel makes up about 18.4 per cent of Centre’s gross tax revenues. Petroleum and alcohol, on an average, account for 25-35 per cent of the own tax revenue of states, as per the Study of Budgets 2020-21 by the Reserve Bank of India.

Of the total revenue receipts of states, Central tax transfers comprise 25-29 per cent, while own tax revenues have a share of 45-50 per cent.

Central and state taxes currently account for about 43 per cent of the retail price of petrol and about 37 per cent of the pump price of diesel in Delhi. Credit ratings agency ICRA had noted in February that the government would have to forego revenue of about Rs 92,000 crore in FY23 to restore excise duties on petrol and diesel to pre-pandemic levels.

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Following the Centre’s move to reduce excise duty on petrol and diesel by Rs 5 and Rs 10 per litre respectively in November last year, 21 states and UTs (with legislature) reduced their VAT in the range of Rs 1.80-10 per litre for petrol and Rs 2-7 per litre for diesel, with the revenue loss to states due to the VAT cut estimated at 0.08 per cent of GDP, as per the RBI’s State Finances report for 2021-22.

Despite the cut in excise duty on petrol and diesel, Central taxes have remained higher by Rs 8 per litre on petrol and by Rs 6 per litre on diesel compared to pre-pandemic levels.

During April-December 2021, taxes on crude oil and petroleum products had yielded Rs 3.10 lakh crore to the central exchequer, of which excise duty amounted to Rs 2.63 lakh crore, while cess on crude oil was Rs 11,661 crore. For the same period, Rs 2.07 lakh crore accrued to the states’ exchequer, of which Rs 1.89 lakh crore was through VAT and rest was through royalty on crude oil and octroi/entry tax among others, as per data by Petroleum, Planning & Analysis Cell.

This compares with Rs 4.19 lakh crore (including Rs 3.73 lakh crore of excise and Rs 10,676 crore as cess) collected as taxes and duties on crude oil and petroleum products by the Centre and Rs 2.17 lakh crore by states (including Rs 2.03 lakh crore of VAT) in 2020-21.

Petroleum taxes with states are shared only out of basic excise duty. The Centre also levies additional excise duty and cesses on petroleum products. In 2020-21, the total central excise duty collected from petrol and diesel was Rs 3.72 lakh crore. The total amount of tax devolved to state governments from the corpus collected under the central excise duty in FY21 was Rs 19,972 crore.

Oil marketing companies (OMCs) have been revising prices since last month in line with rising crude oil prices, after a freeze of 137 days. Ordinarily, the prices of petrol and diesel are revised daily in line with a 15-day rolling average of benchmark prices of the petroleum products. However, oil marketing companies held the prices of both petrol and diesel constant starting November 4, when the Centre announced the excise duty cut. The freeze in price revisions continued till the end of the state elections in Uttar Pradesh, Punjab, Uttarakhand, Goa, and Manipur in March this year.

Ever since the revisions began in March, OMCs have hiked petrol prices by Rs 12 per litre and diesel prices by Rs 10 per litre. The price of LPG has also witnessed an increase with the price of a 15 kg cylinder being hiked by Rs 50 to Rs 949.5 and that of commercial 19 kg cylinders being hiked by Rs 250 to Rs 2,253 in the national capital.

The price of Brent crude has increased by about $22.6 per barrel since November 4 to $103.6 per barrel. India imports about 85 per cent of its crude oil requirements.

After the excise duty cut in November, as many as 19 states and seven UTs reduced their VAT on fuel. All 17 BJP-led states including Gujarat, Uttar Pradesh, Bihar, Haryana, Karnataka, Madhya Pradesh, Himachal Pradesh, Uttarakhand, Goa, Assam, Arunachal Pradesh, Manipur, Meghalaya, Nagaland, Tripura, and Sikkim cut state taxes within a day of excise duty cut. Odisha and Punjab announced a cut within a week of the excise cut.

Delhi announced a cut in VAT in December. Prime Minister Narendra Modi on Wednesday said Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, Jharkhand have not reduced VAT, urging “all states to work as a team in this time of global crisis following the spirit of cooperative federalism”.

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