Excise duty, state VAT cut in offing to cool fuel prices?

Crude oil prices have risen to about USD80 a barrel currently from about USD55 in October. This has pushed retail prices of diesel and petrol in India to a record high.

A drop in drilling activity in the US and concerns over sanctions against Iran have raised crude oil prices. Production cuts by oil producing cartel OPEC have also raised prices

Experts believe that global oil prices will remain firm with OPEC extending production cuts through 2018. OPEC accounts for around 40 percent of global production and India is a major OPEC consumer

Indian imported crude’s average price has risen from USD56.06 in October 2017 to USD72.5 in May 2018

Petrol price in Delhi has crossed Rs 77.17 per litre, while diesel rates hit a record high of Rs 68.34, the highest level in the last four years.

Oil marketing companies can also be asked to slow down the pace of increase in price revisions and also absorb some of the cost.

An immediate relief in terms of lower petrol diesel prices is crucial for the government as it is inching closer to the 2019 general elections.

In India, petrol and diesel prices are high also because of high taxes. Taxes account for about 40 percent of the retail fuel prices.

The finance ministry has raised excise duty nine times between November 2014 and January 2016. The first cut in the excise duty by Rs 2 per litre was applied in October 2017, when petrol price reached Rs 70.88 per litre in Delhi and diesel Rs 59.14.

Subsequent to that excise duty reduction, the Centre had asked states to also lower VAT but just four of them—Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh—reduced rates while others including BJP-ruled ones ignored the call

In February, the government cut excise duty by Rs 2 and additional excise duty on fuel by Rs 6 but imposed a new road cess of Rs 8 per litre nullifying the effects of the cuts

An excise duty cut can also upset the government’s fiscal math. A Re 1 cut in central excise duty on fuel could reduce central revenues by Rs 13,000 crore.

In 2016-17, the tax revenues from petroleum products contributed Rs 2.73 lakh crore to the Centre. This was 14 percent of the Centre’s gross total tax collection of Rs 19.46 lakh crore in 2016-17.

VAT on petroleum products contribute significantly to state revenues. In Maharashtra, where VAT on petrol is 40 percent, taxes on petroleum products account for 12 percent of its total tax revenue.

Higher crude prices could also weaken the rupee further because of high dollar demand as the import bill goes up. The rupee is now hovering around Rs 68 to a dollar.