Fuel price rise: Southern states may gain most; monsoon plays spoilsport

But the windfall gain is restricted to some extent by low consumption in monsoon months

At a time when fuel prices are scaling new highs every day, official data from petroleum ministry shows that for every one rupee increase in petrol and diesel prices, states together earn an additional revenue of around Rs 10 billion and Rs 20 billion, respectively, on annualised basis.

With the base price of both fuels (before state tax gets applied) rising by at least Rs 5 per litre since April, it is widely perceived that states have earned wholesome additional petroleum revenues in the current financial year to date, with Maharashtra leading the pack owing to the highest effective state tax on petroleum products.

However, a closer look at the nature of taxation by states suggests that Telangana, Tamil Nadu, Andhra Pradesh, Assam and Kerala would benefit the most from the price rise, since the ad valorem component of state tax is highest among all states. For every rupee rise in base price of a litre of fuel, Telangana earns 35 paise more on sale of petrol and 27 paise more on diesel. Tamil Nadu earns 34 paise and 25 paise, while Assam earns 33 paise and 24 paise on every one rupee rise in petrol and diesel, respectively.

In Maharashtra (excluding Mumbai), the ad valorem component stands at 25 per cent, lower than these states. It imposes an additional levy of Rs 9 per litre on petrol, which does not change with the rise in base price of fuels.

This windfall gain, however, is unlikely to get accrued immediately, state officials said. The reason is that on average, the sale of petrol and diesel in August and September is 10 per cent less than the monthly average for any year in general, indicating a lean demand in July to September period.

This results in lower revenue in these months, and higher revenue in summer and winter months. Yet, the example of Karnataka is suggestive of additional revenue (see box). It levies 30 per cent sales tax on petrol and 19 per cent on diesel, known as the Karnataka Sales Tax (KST), according to data maintained by the Petroleum Planning and Analysis Cell.

Revenues from KST grew by 15-20 per cent in April-June 2018 year-on-year.

For all states together, the price rise would translate into additional revenue of about Rs 200 billion if the current price jump stays for the remainder of the financial year, an estimate close to Rs 227 billion derived by SBI Research.

In ICRA’s view, even if some states reduce VAT rates on petroleum products, the year-on-year growth of the aggregate taxes on such products would remain healthy in 2018-19, given the rise in price of fuels and “relatively inelastic consumption”.

Following the recent rise in prices, Rajasthan cut taxes on both fuels, followed by Andhra Pradesh and West Bengal.

Consumers have been shelling out more than a rupee every day on petrol and diesel since the beginning of the month due to two reasons: rise in global crude oil prices and the coincident depreciation of the rupee vis-à-vis the US dollar. Crude oil price (Indian basket) rose from $63 to $78.1 per barrel, while the rupee depreciated from Rs 65 to Rs 72.8 per from the beginning of the financial year to date.

The central government, which imposes a fixed excise duty irrespective of the landed price of fuels, has its petroleum sale revenues unchanged. But states, who impose a mix of ad valorem value added tax (VAT) and a fixed cess over the base price, certainly see an increase in revenue as the base price rises.

States earned Rs 480 billion on taxes from all petroleum products in the first quarter of 2018-19. In comparison, states earned Rs 1.84 trillion in 2017-18 (Rs 460 billion per quarter on average) and Rs 1.66 trillion in 2016-17 (Rs 415 billion per quarter).