11 April 2018 14:16:32 IST

Can the government cut petrol and diesel prices?

The Centre is reluctant to include petroleum products in the GST due to the huge revenue implications

Petrol and diesel are again on the boil. A few days back, the price of petrol touched a four-year high while diesel did one up, scaling an all-time high. This is, understandably, making consumers hot under the collar, especially because the price of crude oil — at about $70 a barrel now — is much lower than what it was about four years back, at nearly $115.

When oil prices crashed during most of 2014 and 2015 to about $40 a barrel, the Centre pocketed much of the benefit through serial hikes in excise duty. Some State governments also hiked the value added tax (VAT). Only the crumbs of the price cut were passed on to consumers.

When oil began its ascent, again, the government, reluctant to cut taxes, was left scrambling. Under intense public pressure last October, the Centre blinked and cut excise duty on petrol and diesel by ₹2 a litre. Some States such as Gujarat and Maharashtra followed by cutting the VAT on these fuels. This provided some relief to consumers.

But this time, despite flaring fuel prices, there are no indications (yet) that the Centre or the States are willing to forego revenue. Reports indicate that the Finance Ministry has refused to cut excise duty. The Minister for Petroleum and Natural Gas, Dharmendra Pradhan, with his back to the wall, has repeatedly asked for petrol and diesel to be included under the ambit of the Good and Services Tax (GST) in hopes that this will cut prices. He also regularly exhorts States to cut VAT. Last year, the Finance Minister pointed out that 42 per cent of the Centre’s excise collection went to the States — in effect asking them to share part of the price cut pain.

Excise and VAT

Just how steep are taxes on petrol and diesel? Pretty high, if the numbers can be trusted. After the cut of ₹2 last October, excise duty on petrol is now ₹19.48 a litre (from ₹21.48 earlier) and ₹15.33 a litre (from ₹17.33 earlier) on diesel.

The retail selling price of petrol in Delhi on April 10 was ₹73.98 a litre — more than double of what it is at the dealer’s end (₹35.17). The difference of ₹38.81 was mostly due to excise (₹19.48) and VAT (₹15.73), with the balance of ₹3.6 being the dealer commission. In effect, excise and VAT together (₹35.21) is more than 100 per cent of the dealer cost of ₹35.17 a litre of petrol in Delhi.

In the case of diesel, the total cost of excise (₹15.33) and VAT (₹9.57) is 66 per cent of the dealer cost (₹37.54) in Delhi; the retail selling price was ₹64.96 a litre on April 10.

Varying prices

If you thought high taxes was a Delhi-specific problem, you are way off the mark. Consider this — on April 10, a litre of petrol cost more in Mumbai (₹81.83), Chennai (₹76.75) and Kolkata (₹76.69) than in the capital Delhi. Diesel, too, was costlier in Mumbai (₹69.17), Chennai (₹68.53) and Kolkata (₹67.65).

This is primarily because, even though excise duty is the same across the country, the VAT charged by States varies. In Mumbai, the VAT rate is about 40 per cent on petrol and 25 per cent on diesel. In Chennai, it is 32 per cent and 24 per cent respectively; and 25.3 per cent and 17.6 per cent respectively in Kolkata. In contrast, Delhi charges relatively less — 27 per cent on petrol and 17.3 per cent on diesel.

High VAT is a country-wide phenomenon, with a few exceptions. The highest VAT rate on petrol is charged in Mumbai and surrounding areas (about 40 per cent), followed by the rest of Maharashtra (about 39 per cent), Madhya Pradesh and Andhra Pradesh (about 36 per cent), Punjab (35.4 per cent), and Telangana (33.2 per cent).

Andhra Pradesh (28.6 per cent) charges the highest VAT on diesel, followed by Telangana (about 26 per cent), Chhattisgarh (25.8 per cent), Gujarat (25.5 per cent), and Mumbai and surrounding regions (about 25 per cent).

The regions that charge the lowest VAT on petrol and diesel are Andaman & Nicobar Islands (6 per cent) and Lakshadweep (Nil). Other union territories such as Chandigarh, Puducherry, Dadra & Nagar Haveli, and Daman & Diu also levy relatively lower VAT.

Cash cow

Why is there such reluctance to cut taxes? It’s simple: taxes on petroleum products are cash cows for the Centre and the States, and even cuts of a rupee or two translate to a huge revenue loss. The ₹2 excise duty cut on petrol and diesel is estimated to have cost the government ₹26,000 crore in a full financial year. 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. For the nine months as on December 2017, the excise collection is estimated to be about ₹1,60,000 crore!

Nearly 64 per cent of the excise duty receipts of the Centre and about a quarter of its revenue receipts (taxes, dividends, and such) in 2016-17 came from the petroleum sector.

VAT collected by States and union territories jumped from ₹1,37,000 crore in 2014-15 to ₹1,66,000 crore in 2016-17. For the nine months as on December 2017, the VAT collection is estimated to be about ₹1,31,000 crore.

Reluctance to let go

The government’s reluctance to let go of these milch cows is apparent from its stance to not include these products in the GST regime. While Dharmendra Pradhan, on his part, keeps pitching for inclusion of petroleum products under the GST, this will be a difficult decision to make because of the huge revenue implications.

At present, crude oil, petrol, diesel, natural gas and aviation turbine fuel are not covered under the GST. 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?

The alternative would be to continue with excise and VAT, although at lower rates, while introducing GST at the same time. The GST will at least allow companies and users to get some input tax credit on the products and lower the effective cost. Any possible solution to the conundrum needs quite a lot of financial and political imagination and clear-think.

Did you know?

Petrol and diesel prices in India are costlier than in our neighbouring countries — Pakistan, Bangladesh, Sri Lanka and Nepal.