Centre sees no impact on budget math from excise duty cut even as onus on opposition states to follow suit

The petrol price decreased by Rs 6.07 in Delhi to reach, which revised the retail rate from Rs 110.04 per litre to Rs 103.97 per litre. (Representative image)

The centre’s revenue foregone due to the excise duty cuts in petrol and diesel for the remainder of the current financial year will be around Rs 65,000 crore, a top government official told Moneycontrol.

However, given that tax revenue collections have been robust, such a hit is not expected to impact the budgeted fiscal deficit target of 15.07 lakh crore, or 6.8 percent of gross domestic product.

“We do not expect much of an impact on the fiscal deficit target as the revenue collections so far have been encouraging. Moreover, the excise duty cuts will lead to increased economic activity and thus boost tax collections for the remainder of the year,” the official said.

The centre’s net tax collections (direct plus indirect taxes) for April-September 2021 were Rs 10.81 lakh crore, nearly double of the Rs 5.51 lakh crore that was garnered for the same period last year.

As reported earlier, there is confidence that the tax revenue targets for the year will be exceeded comfortably.

A Rs 1 per litre cut in excise duty of petrol impacts the exchequer by around Rs 5,000 crore per year, while the same would be Rs 14,000 crore for diesel.

Late on November 3, the centre cut the excise duties on petrol and diesel by Rs 5 and Rs 10 per litre respectively. In a move that showed the political implications of the duty cuts, a number of states ruled by Bharatiya Janata Party and allies slashed their duties and value added taxes, as if on cue.

Major states cut taxes on petrol, diesel

These states include Assam, Tripura, Manipur, Karnataka, Goa, Uttar Pradesh, Gujarat, Himachal Pradesh, Haryana, Uttarakhand, Bihar, Odisha and Arunachal Pradesh.

Gujarat, Assam, Tripura, Manipur, Karnataka and Goa cut prices of both petrol and diesel by Rs 7 per litre in addition to Centre's Rs 5 and Rs 10 relief. Uttarakhand reduced the VAT on retail petroleum products Rs 2. In Odisha, VAT was reduced by Rs 3 per litre on both petrol and diesel, and by Rs 3.20 per litre on petrol in Bihar and Rs 3.90 on diesel.

On November 4, Uttar Pradesh and Haryana said said that the prices of diesel and petrol in will be reduced by Rs 12 per litre each.

Central and state-level taxes contribute about 55 percent of the retail price of petrol and 51 per cent for diesel. Apart from central and state taxes, fuel prices also include freight charges and dealer commission. The tax component includes customs duty, excise duty and value-added tax by the state governments.

The centre’s excise duty collection in 2020-21, was Rs 3.9 lakh crore, a staggering 62 percent higher than the Rs 2.4 lakh crore in 2019-20. Out of the Rs 3.9 lakh crore, Rs 3.45 lakh crore was collected only in excise duties on petroleum products.

The Centre levies duties on petrol and diesel, which are at an ad valorem basis, and not absolute figures, and, hence the rise and fall with the price of crude oil. The petroleum excise duties collected by the centre was Rs 1.98 lakh crore in 2019-20 and Rs 1.78 lakh crore in 2018-19.

In just the April-June quarter of the current financial year, the centre collected about Rs 94,181 crore in revenue through excise duties on petrol and diesel.

Data from the government’s Petroleum Planning and Analysis Cell (PPAC) shows that contribution to the state exchequer in the form of sales tax and value-added tax of petroleum, oil, and lubricants has increased by 46 per cent from Rs 1.37 lakh crore in 2014-15 to Rs 2 lakh crore in 2019-20.

Pressure now on major opposition states

The massive reduction in excise duty now puts political pressure on major opposition states such as Rajasthan, West Bengal, Punjab, Kerala and others.

In August, Tamil Nadu became the first state to cut prices, when it cut excise duty on petrol by Rs 3 a litre.

It is by now clear that petroleum excise duties form a huge chunk of centre and state revenues. Now many opposition states, which spoke for the poor, the farmers and the middle classes, while keeping VAT rates on diesel and petrol high, will have to walk the talk.

Opposition states like Rajasthan, West Bengal and others have some steep taxes on petroleum products. West Bengal charges 25 percent sales tax on petrol. Rajasthan has 36 percent VAT plus Rs 1500/kilolitre road development cess on petrol and 26 percent VAT+ Rs 1750/kilolitre road development cess on diesel.

Kerala charges 30.08 percent sales tax plus Rs 1/litre additional sales tax plus 1 percent cess on petrol and 22.76 percent sales tax plus Rs 1/litre additional sales tax plus 1 percent cess on diesel.