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Taxes on petroleum products are an important source of revenue for both the Union government and the states. (Ramesh Pathania/Mint )
Taxes on petroleum products are an important source of revenue for both the Union government and the states. (Ramesh Pathania/Mint )

Fall in oil prices opens window for government to raise taxes

  • Raising excise duty will limit the extent of price reduction that fuel retailers will be able to pass on to consumers
  • Petrol prices were deregulated in June 2010 by the Congress-led United Progressive Alliance (UPA) government

NEW DELHI : The sharp decline in global crude oil prices on Monday opens a window of opportunity for Prime Minister Narendra Modi’s government to increase excise duties on petrol and diesel to boost its revenues, at a time it is struggling to garner resources amid an economic slowdown.

Taxes on petroleum products are an important source of revenue for both the Union government and states as these taxes are discretionary and most of the products are out of the purview of goods and services tax (GST). Presently, only cooking gas, kerosene and naphtha are subject to a GST rate.

Raising excise duty on petrol and diesel will limit the extent of price reduction that fuel retailers will be able to pass on to consumers. The low oil price regime also offers fiscal space to states to consider increasing value added tax (VAT) on auto fuels.

Devendra Kumar Pant, chief economist at India Ratings and Research, said keeping in mind fiscal challenges originating from slower growth and tax collections, government may tinker with excise collections. “However, with crude prices falling by 30% and slower growth of tax collections, a few states have already increased VAT rate on petrol and diesel; as a result, consumers may not get entire benefits of low crude prices," he added.

Madan Sabnavis, chief economist at Care Ratings, said the fall in crude oil prices means lower revenue for the government at a time it is working hard to meet budgetary targets.

“There will be a tendency to hike the ad valorem and specific rates to protect revenue and hence, consumer gains will not be commensurate with the dip in crude oil price," he added.

The Modi administration had raised excise duty on auto fuel several times after coming to power in 2014 to raise resources for welfare schemes. Following the sharp rally in fuel prices, the government had in October 2018 made a 2.5 a litre cut in petrol and diesel prices, by lowering excise duty and asking state-run fuel retailers to take a hit of 1 on every litre of auto fuel. But, after returning to power in 2019, the government raised taxes in the July 2019 budget.

In her maiden budget, finance minister Nirmala Sitharaman raised the special additional excise duty and road and infrastructure cess by 1 a litre each on petrol and diesel.

As per information provided by the country’s largest refiner state-run Indian Oil Corp., petrol attracts an excise duty of 19.98 a litre in addition to the value added tax (VAT) levied by the Delhi state government of 15.25 a litre. Petrol is sold to the end consumer at 71.71 a litre in the capital. Diesel attracts an excise duty of 15.83 a litre and VAT of 9.48, taking the retail price to 64.3 a litre in the capital, according to figures Indian Oil Corp. Ltd released on Monday.

Petrol prices were deregulated in June 2010 by the Congress-led United Progressive Alliance (UPA) government.

Subsequently, the Modi administration decontrolled diesel prices in October 2014. In addition, in mid-2017, the government switched to daily market pricing instead of fortnightly.

Now, only kerosene and cooking gas are directly subsidized.

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