Commodity Analysis

Petrol and diesel, a taxing affair

Anand Kalyanaraman | Updated on January 08, 2018 Published on October 08, 2017

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Despite rise in prices, the governments are holding on to high taxes

After holding out for quite some time, the Centre, last week, blinked and cut excise duty on petrol and diesel by ₹2 a litre. This was in response to growing public anger about the sharp increase in the prices of these fuels over the past few months.

Critics wanted to know why petrol and diesel today cost almost the same as in mid-2014 when the price of crude oil has halved since mid-2014. They pointed out that when the crude oil rout was under way, the governments, instead of passing on the benefit to consumers, chose to pocket most of the gains through several hikes in excise duty and VAT (value added tax) on petrol and diesel. Now, despite rise in prices, the governments are holding on to these high taxes instead of cutting them.

The Oil Minister and the Finance Minister initially defended the high excise duties as necessary to fund the government’s development and infrastructure programmes, and challenged the States to cut VAT on petrol and diesel. The Finance Minister also pointed out that 42 per cent of the Centre’s excise collection went to the States. But eventually, the Centre decided to back off, even if just a bit.

Excise duty on petrol is now ₹19.48 a litre (from ₹21.48 earlier) and on diesel, it is ₹15.33 a litre (from ₹17.33 earlier). This ₹2 excise cut last week saw the price of petrol in Delhi fall by ₹2.5 a litre and that of diesel by ₹2.25 a litre. Now, the Oil Minister says, it is the turn of States to play their part — he has exhorted States to lower the VAT charged by them on petrol and diesel by 5 per cent to give consumers more relief.

Why the difference

Just how steep are taxes on petrol and diesel? Pretty high, show the numbers. Consider this. After the recent excise duty cut, the retail selling price of petrol in Delhi, on October 5, was ₹68.38 a litre – more than double the ₹30.81 at the dealer’s end. The difference — ₹37.57 — was mostly due to excise ( ₹19.48) and VAT ( ₹14.54) with the balance ( ₹3.55) being the dealer commission.

In effect, excise and VAT together ( ₹34.02) is 110 per cent of the dealer cost of ₹30.81 a litre of petrol in Delhi. In the case of diesel, the total of excise and VAT is 77 per cent of the dealer cost in Delhi.

Now, if you thought high taxes was a Delhi-specific problem, wait. On October 5, a litre of petrol cost much more in Mumbai ( ₹77.51), Chennai ( ₹70.85) and Kolkata (₹71.76) than in capital Delhi ( ₹68.38). Diesel too was costlier in Mumbai (₹60.44), Chennai (₹59.9) and Kolkata (₹59.56) than in Delhi (₹56.9).

This is primarily because, though excise duty is the same across the country, VAT charged on petrol and diesel is higher in Mumbai, Chennai, and Kolkata than in Delhi. In Mumbai, VAT is about 48 per cent on petrol and 28.4 per cent on diesel. In contrast, Delhi charges relatively less VAT — 27 per cent on petrol and 17.4 per cent on diesel.

Ergo: high VAT is a country-wide phenomenon, with just a few exceptions. The highest VAT on petrol is charged in Mumbai (47.9 per cent), followed by rest of Maharashtra (46.8 per cent), Madhya Pradesh and Andhra Pradesh (38.9 per cent).

On diesel too, the highest VAT is charged in Mumbai and the States mentioned above. Over the last year, States such as Maharashtra, Kerala and Delhi had increased VAT sharply. The regions which charge the lowest VAT on petrol and diesel are Andaman & Nicobar Islands (6 per cent) and Lakshadweep (Nil). Goa and some North-Eastern States such as Mizoram, Meghalaya and Manipur also levy lower VAT than the rest of the country.

Following the Centre’s excise cut and exhortation to States to cut VAT, the BJP-ruled Gujarat government has indicated that it may lower VAT on petrol and diesel; currently it is 28.96 per cent. It needs to be seen whether it walks the talk and if other States follow suit. Also, whether the Centre would consider cutting excise duties further needs to be seen.

The challenge

Petroleum and oil products contribute significantly to the government’s tax receipts. Excise collections on petroleum and oil products jumped from about ₹99,000 crore in 2014-15 to about ₹2,43,000 crore in 2016-17. VAT collected by States and Union Territories jumped from ₹1,37,000 crore in 2014-15 to ₹1,66,000 crore in 2016-17.

That the governments in India are loathe to let go of these milch cows is apparent from their being kept away from the proposed Goods and Services Tax (GST) regime.

Oil Minister Dharmendra Pradhan, on his part, has made a strong pitch for inclusion of petroleum products under GST. Crude oil, petrol, diesel, natural gas and aviation turbine fuel are not under GST. However, bringing petrol and diesel under GST is a formidable challenge. The highest rate (including cess) now under GST is 45 per cent, far lower than the current effective tax rate on petrol and diesel. Will the Finance Ministry and the States agree to such a huge revenue loss?

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Published on October 08, 2017
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