Onus on Centre, states to rein in fuel prices

WHEN Covid-19 broke out in 2020, the Central Government hiked duties on petrol and diesel in March and May to try and make up a bit of the fall in indirect tax collection as a result of the pandemic-induced economic slowdown.

Then, in early November last year, the Centre announced a cut in excise duty on petrol and diesel. Thereafter, the prices of fuels were held constant for over four months till the end of the Assembly elections in five states. Thereafter, there followed a period of daily price rise for a fortnight.

India imports a huge quantity of the fuel that it consumes and because of the Ukraine war, global crude prices have shot up. Worse, the rupee has been steadily depreciating against the US dollar, so the rupee price that oil companies pay to get the imported stuff has been going up. While the imported cost of fuel is mostly not in India’s hands (barring of course import duties), the discretionary part — taxes that both the Central and state govts levy on fuels — is substantial. So, the end-user is hit by a double whammy.

However, a couple of weeks ago, the Centre cut excise duties on both petrol and diesel in the wake of inflation touching a new high. With these cuts, the duties are now at pre-pandemic levels. To make sense of these ups and downs, we need to look at some of the basics.

Diesel and petrol cost a bomb in India. This is for two key reasons. India imports a huge quantity of the fuel that it consumes, over 80 per cent, and recently, in the run-up to the Ukraine war and thereafter, global crude prices have shot up. Worse, the rupee has been steadily depreciating against the US dollar, so the rupee price that the oil companies pay to get the imported stuff has been going up even further.

While the imported cost of fuel is mostly not in India’s hands (barring, of course, import duties), the discretionary part — taxes that both the Central and state governments levy on the fuels — is substantial. So the end-user is hit by a double whammy.

What is worse is that the taxation policies of the government have been linked as much to the global prices as the exigencies of politics. This adds a further element of uncertainty. Your attempt to plan your finances goes haywire as politics makes the price you will have to pay over time for fuel totally unpredictable.

To illustrate what the state takes away, let us look at the prices consumers were paying in Delhi in mid-April. Just about half of the Rs 105 price that was being paid for a litre of petrol was the base price, the actual cost of the fuel. Well, over a quarter of it (Rs 28) was taken away by the Centre through excise duty. The state government, for its part, took away Rs 17 or a sixth of the retail price through sales tax or VAT. It is roughly the same story with diesel.

How important is this to the finances of the Centre and the states? Excise duty on fuel makes up as much as 18 per cent of the Centre’s gross tax revenue. As for the states, petroleum and alcohol account for as much as a quarter to a third of states’ own revenue. According to one research agency, if in the current financial year, the Centre were to restore excise duties on petrol and diesel to pre-pandemic levels, it would lose Rs 92,000 crore of revenue.

The dependence of the states on revenue from petroleum and alcohol is particularly heavy as they do not have any control over indirect taxes on other commodities which are routed through GST. So when states want to go in for additional resource mobilisation, they have to look to petroleum and alcohol, subjecting these two to a heavy incidence of taxation.

Taxes that the state governments levy on fuel actually have a cascading effect, that is the consumer ends up paying taxes on taxes. States levy VAT or sales tax ad valorem (based on the value) on the price they get from the Centre which includes elements like the basic price, freight and excise duty levied by the Centre. Let us assume that during post state elections price rise phase, what the Centre charged went up by Rs 13, from Rs 100 to Rs 113. If on this, the states impose a levy of say 10 per cent, then the consumer would end up paying 10 per cent more on Rs 113 instead of Rs 100, that is Rs 11.30 instead of Rs 10.

The fluctuations in crude prices and concomitant tax rates have expectedly become a bone of contention between the Centre and the states. The Centre has accused the states of not bringing down their VAT rates even as the Centre has reduced excise duties. The Prime Minister has singled out seven Opposition-ruled states for not reducing VAT and urged that all the states and the Centre work together in a spirit of “cooperative federalism” at a time of global crisis. Pointing to the lack of such cooperation, the Union Petroleum Minister has noted that the BJP-ruled states have cut VAT on fuel.

This has led to counter allegations from the states. The West Bengal chief minister has alleged that the Centre owes the state Rs 97,000 crore. In the same vein, the Maharashtra chief minister has alleged that the Centre owes the state Rs 26,500 crore. The Kerala chief minister has alleged that the fuel price hikes have also been due to the Centre raising cess and surcharge which do not have to be shared with the states. The big issue weighing with the states is that they will stop getting compensated for revenue loss on account of GST from after June.

What is the way out? Both the Centre and the states seek to milk the fuel sector for whatever it is worth even as they blame each other for not carrying their share of the load. At a time when international crude prices are skyrocketing (since November they have gone up by a quarter), if consumers cannot get any price relief, they should at least be spared the atmospherics and the shadow boxing. Only cooperative federalism, sincerely pursued by both sides, can give the consumer some psychological relief. That is all that he can expect to get.