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For India that imports about 85 per cent of the crude oil it consumes, the crash of oil prices should — in a normal world — mean good news. It can help bring down the current account deficit, inflation, oil subsidies and forex outflows.
But in the abnormal Covid-19 times that we live in, there are big flipsides too.
The oil price crash has been driven largely by massive demand destruction in crude and refined products such as petrol, diesel and aviation turbine fuel (ATF).
This will slash the petro-taxes that the Centre and States collect.
Cash cow in trouble
The petroleum sector is a cash cow; it contributed 92 per cent to the Centre’s excise duty receipts in FY19.
The Petroleum Planning and Analysis Cell (PPAC) says that 20 per cent of the Centre’s revenue receipts and 8 per cent of the States’ revenue receipts came from the petroleum sector.
The sector contributes to the exchequer in many ways, including excise duty, sales tax/value-added tax (VAT), cess on crude oil, royalty on crude oil/natural gas, customs duty, NCCD on crude oil, GST, octroi, entry tax and other duties.
Besides, oil and gas companies pay income tax, dividends, dividend tax and profit petroleum on oil/gas exploration to the government (see table).
Much of these could see a sharp cut in FY21. Even the projected tax collections from the sector in the year gone by (FY20) will take a hit — with the nationwide lockdown since March 25 slashing demand for petro-products.
Demand squeeze
The PPAC says that the demand for oil and petroleum products slowed significantly in the latter half of March, post the Covid-19 outbreak.
Overall, the consumption of petroleum products during March declined 17.8 per cent y-o-y.
Most products, with the exception of, say, LPG, saw their demand dip. Petrol sales fell 16.4 per cent y-o-y in March, after continuous growth for the last 30 months.
Diesel consumption during the month fell 24.2 per cent y-o-y, and ATF sales fell 32.4 per cent.
Things would have only gotten worse in April — with the lockdown extended for the whole month and beyond to May 3.
Reports say that petrol and diesel consumption in April is down 60-70 per cent y-o-y, while ATF demand has crashed more than 90 per cent.
When the lockdown is fully lifted, it could take time for petro-products demand to revive to earlier levels, given the expected slowdown in the economy.
Tax trouble
This implies trouble for tax collections.
The cut in consumption of petro-products means that, among other taxes and collections, the Centre’s excise duty and States’ sales tax/VAT collections will drop sharply.
Petrol, diesel, ATF, crude oil and natural gas remain outside the GST and are subject to excise duty and sales tax/VAT.
Assuming a conservative 30 per cent drop in demand for these products in FY21, and about 90 per cent of excise collections coming from these products like before, the Centre’s total excise duty collection for FY21 could fall to ₹1.95-lakh crore from the budgeted ₹2.67-lakh crore.
The Centre could try to mitigate the hit by hiking the tax — like it did on March 14 when it raised the excise duty on petrol and diesel by ₹3 a litre.
The States could be hit harder. That’s because unlike the Centre which collects excise duty on a fixed price per litre — currently ₹22.98 on petrol and ₹18.83 on diesel — the States mostly collect sales tax/VAT on ad-valorem (percentage of price) basis.
So, they get hit both by decline in volumes and fall in the price of petro-products. Some States such as Karnataka increased the price of petrol and diesel from April 1 to mitigate the impact.
This could also be a reason why the oil marketing companies — likely on the Centre’s nudge — have kept the prices of petrol and diesel unchanged since March 16.
The prices of these fuels have stayed the same despite the daily-pricing mechanism that should have translated into pump prices falling with the crash in oil prices.
It could also be that the Centre, through the oil companies, is trying to marshal financial resources to fight the coronavirus impact.
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