Govt can cut excise duty on petrol, diesel by ₹8.5 a litre without hurting revenues

The government has room to cut excise duty on petrol and diesel by up to ₹8.5 per litre without impacting its target for revenue from the tax on the two fuels, analysts said.

Petrol and diesel prices hover at a historic high following a relentless increase in rates over the past nine months. There have been calls by opposition parties as well as sections of society to the government to reduce excise duty to ease consumer pain.

"We estimate excise duty on auto fuels in FY22 (April 2021 to March 2022), if it is not cut, at ₹4.35 lakh crore versus budget estimate of ₹3.2 lakh crore.

"Thus, even if excise duty is cut by ₹8.5 per litre on or before April 1, 2021, FY22E budget estimate can be met," ICICI Securities said in a note.

It expressed optimism for an excise duty cut given demand recovery, impending privatisation and inflation concerns but expected it to be more modest than ₹8.5 a litre.

Excise duty was raised by ₹13 and ₹16 per litre on petrol and diesel between March 2020 and May 2020, and now stands at ₹31.8 on diesel and ₹32.9 per litre on petrol.

The increase in excise duty was to mop up gains arising from international crude oil prices falling to a two-decade low.

But, with oil prices recovering, it has not yet restored the taxes to their original levels.

"If the cut is more modest, which we expect, FY22 excise duty will be higher than the budget estimate," ICICI Securities said.

Central and state taxes make up for 60% of the retail selling price of petrol and over 54% of diesel.

Petrol is priced at ₹91.17 per litre in Delhi and diesel comes for ₹81.47.

The rates of regular petrol had last month crossed the ₹100-mark at a few places in Rajasthan and Madhya Pradesh, which levy the highest value-added tax (VAT) on the fuel in the country.

Between November 2014 and January 2016, the government had raised excise duty on petrol and diesel on nine occasions to take away gains arising from plummeting global oil prices.

In all, duty on petrol rate was hiked by ₹11.77 per litre and that on diesel by 13.47 a litre in those 15 months that helped the government's excise mop-up more than double to ₹2,42,000 crore in 2016-17, from ₹99,000 crore in 2014-15.

The government had cut excise duty by ₹2 in October 2017, and by ₹1.50 a year later. But, it raised excise duty by ₹2 per litre in July 2019. It again raised excise duty on March 2020, by ₹3 per litre each. In May that year, the government hiked excise duty on petrol by ₹10 per litre and that on diesel by ₹13 a litre.