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Why the fuel taxes are a bone of contention

High retail prices of petrol and diesel have become a burden on consumers and a drag on economic recovery but it helps the central and state governments balance their budgetsPremium
High retail prices of petrol and diesel have become a burden on consumers and a drag on economic recovery but it helps the central and state governments balance their budgets

  • High retail prices of petrol and diesel have become a burden on consumers and a drag on economic recovery but it helps the central and state governments balance their budgets. Mint takes a look at what is behind the tussle over fuel taxes

High retail prices of petrol and diesel have become a burden on consumers and a drag on economic recovery but it helps the central and state governments balance their budgets. Mint takes a look at what is behind the tussle over fuel taxes:

Why are fuel taxes a bone of contention?

A steady rise since November in global prices of petrol and diesel, to which local retail prices of these fuels are linked, together with high taxes, have pushed up inflation in the country. State-run oil retailers who held prices steady between early November and the fourth week of March, have since increased retail prices. The Central and state governments are dependent on fuel for a big chunk of their revenues, making energy prices a controversial issue. Prime Minister Narendra Modi’s appeal to some states on Wednesday to lower value added tax (VAT) received sharp reactions from states such as West Bengal and Maharashtra.

Fueling inflation
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Fueling inflation

Are states willing to cut VAT on petrol & diesel?

Taxes on fuel are an easy source of revenue to bridge budgetary gaps. After the first wave of the covid-19 pandemic in FY21, 22 states and Union territories raised duties on petrol and diesel to mobilize revenue, according to a Reserve Bank of India (RBI) report. After the Centre cut excise duty last November, 21 states and Union territories reduced VAT on petrol and diesel. However, the opposition-ruled states are insisting that the Centre further lower the duty. What irks them is that a large part of the central excise duty on petrol and diesel is levied as cess, proceeds of which are not shared with states.

What are the constraints of states in lowering fuel taxes?

Petroleum and liquor account for roughly a third of states’ own tax revenue, making it difficult for states to forgo a part of it. The economic downturn and the pandemic had led to higher spending needs and reduced revenues. States’ consolidated fiscal deficit had jumped from 2.6% of gross domestic product (GDP) in FY20 to 4.7% in FY21, according to official data.

What are the options to cool inflation?

As India is heavily dependent on imports for crude, there is no way of cooling energy price inflation other than by lowering taxes on the finished product or by re-introducing subsidies. Subsidies enable state-owned fuel retailers to sell at a lower price, while private refiners who do not get subsidy from the government are forced to incur losses. Given that higher fuel prices are getting transmitted to prices of other items as transport-ation becomes costlier, experts do not think that monetary tightening would be the right solution.

Is there any way to deal with high fuel prices?

India has been experimenting with diversifying its source of oil and gas imports, creating strategic oil reserves, blending ethanol with autofuel and an ambitions electric mobility plan. However, these measures are yet to achieve a critical mass to have a positive impact on energy prices in the face of a massive surge in global prices of crude oil, gas, petrol, and diesel. The Centre is feeling the pressure of high energy cost. Experts believe that oil price above $100 a barrel could shave off 30-60 basis points from GDP growth rate.

 

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