With crude on boil, tax structure helps some States rake it in more than Centre

Crude oil prices are on a boil, with Brent hitting $63.8 a barrel, up 67 per cent since last November. Indian consumers are facing the heat with petrol prices hitting ₹100 a litre in States such as Rajasthan. This price increase will not benefit the Centre much because the excise duty on petrol and diesel is a specific tax, charged on the number of units sold.

However, most States calculate sales tax/VAT on petrol and diesel on ad valorem basis, based on the sale value, thus gaining from the increase in the prices. Especially States such as Rajasthan, Telangana, Karnataka and Madhya Pradesh that have high rates of tax on petrol and diesel stand to gain from this price increase.

The pricing of petrol and diesel in India is based on the sour grade (Oman and Dubai average) and sweet grade (Brent Dated) crude oil processed in Indian refineries in the ratio of 75.62: 24.38. This basic value of crude accounts for around 36 per cent of the final cost of petrol (in Delhi). Freight charges and dealer commissions account for around 4 per cent. The remaining 60 per cent of the retail price of petrol and 54 per cent of diesel goes to the Centre and States as taxes.

Method of calculation

For every litre of petrol, the basic excise duty is ₹ 1.40, special additional excise duty ₹ 11, agriculture, infrastructure and development cess ₹ 2.50 and additional excise duty (road and infrastructure cess) ₹ 18. The excise duty and cess on diesel are also similarly linked to the quantity sold and not the value. While this helps the Centre protect its revenue in periods when crude oil prices decline, it caps the income when prices increase.

States and Union Territorieshave different approaches to taxing petrol and diesel, with some using both ad valorem and specific duty structure, while others resort only to ad valorem duty. Some cap the revenue from POL products, complicating things further.

Among the larger States, Rajasthan squeezes the most from petrol and diesel sales. The State charges VAT at 36 per cent plus ₹1,500 per kilo litre as road development cess on petrol and VAT of 26 per cent and ₹1,750 per kilo litre of road development cess on diesel.

Madhya Pradesh is yet another State that taxes petrol and diesel heavily. It charges 33 per cent VAT plus ₹ 4.5 per litre additional VAT and 1 per cent cess. It taxes diesel at a lower VAT rate of 23 per cent, plus additional VAT of ₹ 3 per litre and 1 per cent cess.

Among the larger States, Karnataka has the highest sales tax rate of 35 per cent on petrol and 24 per cent on diesel.

Delhi goes ad valorem for petrol with 30 per cent VAT and a mix of ad valorem and specific duties for diesel.

Maharashtra and Tamil Nadu, too, have adopted a mix of ad valorem and specific duty in pricing.

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