No relief soon from oil price hikes

No relief soon from oil price hikes

While petrol, diesel prices have been on the boil for some time, despite a nation-wide protest by opposition, the Narendra Modi government has ruled out any immediate reduction in excise duty to bring down the retail prices of auto fuels, and instead has urged the states to take action.

A few states like Rajasthan and Andhra Pradesh have announced a VAT cut to provide some relief, while Andhra Pradesh has announced an Rs 2 per litre cut in VAT on petrol and diesel, and poll-bound Rajasthan a 4% cut. However, other states have remained largely unenthusiastic.

The government is highly reliant on the tax revenue from petrol and diesel, and these remain a key source for both the Centre and states, and a cut will hit their fiscal position. Notably, the Centre has mopped up Rs. 2.29 lakh crore from excise duty on petroleum products in 2017-18 and Rs. 2.42 lakh crore in 2016-17. The excise duty on petrol is currently at Rs. 19.48 per litre, and amounts to Rs. 15.33 per litre on diesel. The Centre had also raised excise duty nine times between November 2014 and January 2016 to shore up its finances even as global oil prices fell. However, the excise duty cut came in just once — by Rs. 2 per litre — in October last year.

Crude petroleum attracts 20% oil industry development cess, and a National Calamity Contingent Duty (NCCD) of Rs. 50 per metric tonne. There’s no Customs duty on crude, but petrol and diesel attract a Customs duty of 2.5%. Rates of state sales tax or Value Added Tax (VAT) vary from state to state. Unlike excise duty, VAT is ad valorem, and results in higher revenues for the state when rates move up, notes a report.

Apart from taxes, both the centre and the states have other earnings too, from the petroleum sector. Taking into account the cumulative amount from dividend income, dividend distribution tax, corporate/income tax and profit on exploration of oil and gas, the Centre earned a Rs. 3.43 lakh crore in 2017-18 and Rs. 3.34 lakh crore in 2016-17, from crude and petroleum products.

Contrary to popular belief, bringing petroleum related products under GST’s ambit too is unlikely to bring down the prices, as states are likely to levy additional taxes to boost revenues. Even if petrol and diesel are included under GST, prices are unlikely to fall, because of the GST principle of keeping rates close to the earlier tax rates.