The Prime Minister’s statement urging governments of Opposition ruled States such as Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala and Jharkhand to join other States in cutting state taxes on petrol and diesel created a lot of furore. Analysis of State taxes on fuel after the cut in taxes shows that these cuts have not made much of a difference to the final retail price charged to customers. 

The Centre had hiked central excise duty on petrol by ₹13 and on diesel by ₹16 between March and May 2020, to take advantage of the steep decline in crude oil prices at the onset of the pandemic. Regular increases in central excise duties prior to this have resulted in Centre’s taxes amounting to almost 30 per cent of the retail selling price of petrol and diesel. The cut in central excise duty in November 2021—₹5 on petrol and ₹10 on diesel—was not enough to provide relief to customers, as international crude oil prices began racing higher due to Russia-Ukraine war and post-pandemic demand. 

States and Union Territories were therefore asked to cut VAT charges on petrol and diesel to cool down prices. Many States including Uttar Pradesh, Gujarat, Karnataka, Haryana, Madhya Pradesh and Goa reduced the State tax on petrol by ₹7 per litre in November. Punjab made the largest cut, slashing petrol taxes by ₹10 and diesel tax by ₹5 per litre. The quantum of cut was smaller in States such as Bihar (₹3.2), Himachal Pradesh (₹2) and Odisha (₹3). 

Tamil Nadu cut taxes on petrol by ₹3 per litre in August last year and hence did not follow with further cuts. 

Taxes high is most States 

The Prime Minister has specifically pointed out that some opposition party ruled states are burdening consumers by not cutting taxes on fuel.  But a closer look at the State taxes on fuel per litre across some of the important States, shows that States which have cut fuel taxes in November are not collecting lower taxes on fuel, as compared with States which have not reduced taxes. 

For instance, state taxes on each litre of petrol amounts to ₹27.06 in Bihar and ₹28.38 in Madhya Pradesh. This is much higher as compared with taxes in States which have not reduced taxes such as Jharkhand and Delhi. 

Barely any relief

The inference is that customers are unlikely to have received much of a relief due to the token cuts made by States in November. The burden on end-users is largely related to the tax rates existing prior to the commencement of tax cuts. 

Retail selling price in some States such as Delhi, Uttar Pradesh and Gujarat is lower because they charged a lower rate of taxes, even prior to November 2021.