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Home >Economy >Two-thirds of fuel taxes have come from diesel

It is now well known that the central government has earned a lot of money through fuel taxes. The central excise duty on petroleum products (petrol, diesel, aviation turbine fuel, natural gas, cess on crude oil) helped the government earn 3.45 trillion in 2020-21. This was 74% more than the 1.98 trillion it collected during 2019-20. This jump came in the middle of a pandemic.

A bulk of this jump happened due to a massive increase in excise duty earned on petrol and diesel, particularly diesel. The excise duty earned on the sale of diesel more than doubled to 2.33 trillion from 1.12 trillion. This happened during a year when the consumption of diesel fell by 12% to 72.7 million tonnes.

The massive increase in the tax collections from diesel was primarily on account of the excise duty being raised twice. It was first raised by 3 to 18.83 per litre in March 2020, and then by 13 per litre to 31.83 a litre in May 2020, once crude prices crashed to extremely low levels in the aftermath of the spread of the covid pandemic. The government decided not to pass on the fall in the oil price to the end consumer and raised the excise duty big time.

Since 2 February, the central excise duty on diesel has stood at 31.80 per litre. This is for unbranded diesel. For branded diesel, the excise duty stands at 34.20 per litre.

During 2020-21, the central excise duty on diesel doubled. This was reflected in the more than doubling of the central excise duty earned from this fuel.

It is also reflected in the fact that in 2020-21, more than two-thirds of the central excise duty earned from petroleum products came from diesel. It was at 56.6% in 2019-20.

The increase in excise duty on diesel, along with a jump in crude prices from last year, pushed the retail price of the fuel to close to 90 a litre. This high price of diesel has fed into inflation.

Some experts believe that the increase in the price of petrol and diesel doesn’t matter much because the weight of these fuels in the basket of items that constitute the inflation index is very low. For example, in the wholesale price index (WPI), one of the indices that measure inflation, the weight of diesel is just 3.1%. And that of petrol is 1.6%.

So, the total weightage of petrol and diesel in the WPI is just 4.7%. The point being made is that such a low weightage will have very little impact on inflation as measured by the WPI. This is incorrect.

If we look at the figures for June, petrol and diesel inflation both stood at around 60% from a year earlier. Even with a weightage of 4.7%, this contributes around 2.8% (4.7% of 60%) of the overall inflation of 12%. Hence, the increase in petrol and diesel prices are responsible for around a fourth of overall inflation as measured by the WPI, which isn’t insignificant.

Most goods in India are transported from the place of production to markets by trucks. Given that trucks use diesel, any increase in diesel price feeds into inflation.

The central government continues to earn a lot of money through the high excise duty on petrol and diesel. In the three months to June, it earned 94,181 crore, and a simple projection on this number tells us that the government is likely to make 3.8 trillion from excise duty on just petrol and diesel during 2021-22. Thus, the excise duty on petroleum products overall is likely to cross 4 trillion.

The good news is that the crude prices are falling. The Indian basket of crude oil price was at $71.2 per barrel as of 19 July, down from $75.26 on 15 July. This should push the price of petrol and diesel downwards in the short-term.

(Vivek Kaul is the author of Bad Money)

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