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The Union finance ministry has decided to hold fire on making any tax adjustments, despite retail petrol prices breaching the 100 per litre mark in several places across the country. The decision follows a high-level review of the rising trajectory of global oil prices.

The Centre’s decision comes amid mounting expenses to support an economic revival and strengthen India’s healthcare infrastructure when the second wave of the covid-19 pandemic is raging across the country.

The central government expects states to be on board for a possible coordinated tax rate revision as they benefit more from a spike in oil prices because they levy value-added tax (VAT) as a percentage of the price. Unlike state VAT, central excise duty is a fixed amount in rupee terms per litre and fetches higher revenue only when consumption goes up and not with an increase in prices.

“We had a meeting in June when the oil price trend was discussed. There is no decision yet on tax adjustments. It is a fact that both central and state governments need revenues at this juncture," said a government official requesting anonymity.

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On 2 July, Union finance minister Nirmala Sitharaman said at a press conference that taxes were levied by both central and state governments and the issue of a surge in oil prices was “fairly layered". Central and state governments have to be talking about it, the minister said and highlighted that state levies are on an ad valorem basis.

According to estimates by commodity experts, crude oil price may touch $100 a barrel by next year as travel demand rebounds, Bloomberg news agency reported on 21 June, quoting Bank of America Corp.

The finance ministry has not conducted any study to make its own estimates on the trajectory of oil prices for the coming months, the official said.

However, a further spike in oil prices will be of immense political significance to the government headed by Prime Minister Narendra Modi, which has benefited from low global prices, enabling it to mobilize higher tax revenue for financing welfare schemes.

Revenue losses from the relief given on goods and services tax (GST), as well as corporate and personal income tax, were in part made good by revenues from central excise collections, mostly from petrol and diesel. This is in addition to the revenue saved by deregulating diesel prices from October 2014.

State-run oil marketing companies (OMCs) have price-setting freedom, but at times they calibrate price revisions in such a way that daily fluctuations remain flat. OMCs have been adjusting the retail prices of auto fuel on the basis of international prices. Local prices of petrol and diesel are linked to global prices of the finished fuels, not on crude. While global prices of petrol and diesel depend on the cost of crude oil in general, there are often fluctuations depending on the state of demand and supply of each fuel.

At present, petrol is being retailed at more than 100 a litre in all the four metros in India.

Meanwhile, diesel prices were cut by 16 paise per litre on Monday for the first time in three months, while petrol prices were up by 28 paise per litre, Mint reported.

Petrol and diesel were selling at 101.19 per litre and 89.72 per litre, respectively, in Delhi at Indian Oil Corp. Ltd outlets.

Since the results for the assembly elections in West Bengal, Assam, Kerala, Tamil Nadu and Puducherry were announced on 2 May, petrol prices have been increased 39 times.

Following the coronavirus outbreak, the prices of Indian basket of crude oil had plunged to $19.90 in April last year, before recovering to $71.98 a barrel in June, data from the Petroleum Planning and Analysis Cell showed.

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