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Crude is cheaper, why isn’t petrol? It’s the tax trick

  • On 1 March, petrol sold at ₹71.71 a litre in Delhi. On 6 May, it sold at an almost similar price of ₹71.26 a litre. Yet, the price of the Indian basket of crude more than halved from $50.90 a barrel on 2 March to $23.04 a barrel on 4 May.

Why is the price same now as it was in March?

  • The base price of petrol as of 1 March was ₹32.61 a litre. It has since fallen to ₹17.96 a litre, reflecting the fall in oil prices.
  • However, between then and now, the central government has increased the excise duty on petrol by 65%, from ₹19.98 a litre to ₹32.98 a litre, primarily on account of the rise in special additional excise duty and additional excise duty (road and infrastructure cess).
  • This apart, the Delhi government has increased the value-added tax (VAT) on petrol from 27% to 30%. As a result, taxes on the commodity have jumped from ₹35.23 a litre to ₹49.42 a litre.

What’s the implication of this rise in taxes?

  • In March, the retail selling price of petrol in Delhi was 120% more than its base price. Now it is 297% higher than its base price.
  • The case with diesel is similar. Between March and May, the central government increased the excise duty on diesel by 101%, from ₹15.83 a litre to ₹31.83 a litre. On top of this, the Delhi government increased VAT on the commodity from 16.75% to 30%. This has led to the price of diesel in Delhi increasing from ₹64.30 a litre on 1 March to ₹69.39 a litre on 6 May. The retail selling price of diesel is now 275% more than its base price. In March, it was 77.6% higher than its base price.

Why have taxes been raised on petrol and diesel?

  • The Centre’s collection of excise duty and goods and services tax (GST) fell drastically as production and consumption of goods and services slid because of the lockdown.
  • State governments’ collection of taxes on petrol, diesel and alcohol, and stamp duty on real estate transactions also fell. This left the governments with little option but to increase taxes on fuel.

Are more states likely to adopt this measure?

  • The state governments of Haryana and Tamil Nadu have already increased VAT on petrol and diesel to fill up their coffers.
  • Ordinarily, raising taxes on petrol and diesel is one of the easiest ways for any government to increase tax collections.
  • However, these are not normal times. Most private vehicles across large parts of the country are not plying due to the lockdown.
  • As such, any increase in tax collections because of higher taxes will happen as and when the economy starts to open up and private vehicle usage goes up.

What else does the hike in taxes tell us?

  • It tells us that the central government does not expect tax collections from excise duty on goods other than petrol and diesel, GST as well as income tax—individual and corporate—to match what it has budgeted for this fiscal.
  • Hence, this massive increase in excise duties on petrol and diesel. Having said that, this is a measure the government has used often over the years.

Vivek Kaul for LiveMint

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