States to bear brunt of fuel price cuts, impact to be felt in H2 of FY19

States will bear 42% of the loss on account of the Rs 1.5-a-litre cut in basic excise duty, apart from the additional cuts they have announced; Gujarat, Maharashtra, Haryana to be worst hit

With crude oil prices touching $85 a barrel last week, the Union Government announced a Rs 2.5 cut in petrol and diesel prices. Since then, several states governments have followed suit. 

While revenue from crude oil accounts for a significant portion of both central and state government tax collections, the brunt of these cumulative price cuts is likely to be borne by state governments, and not the Centre. 

Take the reduction in petrol and diesel prices announced by the central government. 

Of the Rs 2.5 reduction in prices, Rs 1.5 per litre is on account of the cut in basic excise duty announced by the Centre. The remaining one rupee per litre will be absorbed by oil marketing companies. The total revenue loss on account of the Rs 1.5 reduction basic excise duty has been pegged at Rs 105 billion by the Central Government. 

Now, as revenue from basic excise duty is part of the divisible tax pool that is shared between the Centre and states, put together, states stand to lose 42 per cent of Rs 105 billion or Rs 44.1 billion. Thus, the centre’s loss will only be to the tune of Rs 0.87 per litre (58 per cent of Rs 1.5) or Rs 60.9 billion. 

Further, as several state governments have also announced additional cuts of Rs 2.5, their own tax revenues from petroleum, oil and lubricant (POL) products will also be hit. 

But it is difficult to arrive at precise estimate of the losses that state governments will incur, as they levy taxes on ad valorem basis. However, it is safe to say that their revenues would come under pressure in the second half of FY19, offsetting the gains made in the first half of FY19. 

An analysis of state tax revenues shows that Gujarat, Haryana and Maharashtra are likely to see their revenues under most pressure as these states earn the most from taxes on POL products. 

For instance, in 2017-18, Gujarat earned Rs 149 billion from POL products. This accounts for roughly 11.3 per cent of the state’s revenue receipts or 19 per cent of the state’s own tax revenue. Similarly, Haryana and Maharashtra earned, 10.9 per cent and 9.9 per cent of its revenue receipts from sales tax/VAT on POL products. 

The states of Andhra Pradesh, Karnataka and Rajasthan, which had announced similar fuel price cuts earlier, will also see a pressure on their tax collections as revenue from POL products accounted for 7.9 per cent, 9.1 per cent and 8.6 per cent of the states’ revenue receipts respectively in 2017-18. 

Shortfall in tax collections could prompt states to tap the bond markets to a greater extent than what has been anticipated. The pressure is likely to be felt in the fourth quarter of the current financial year. Prior to these price cuts, ICRA had estimated cumulative state borrowing to range between Rs 4.9 to Rs 5.2 trillion in the current financial year, up from Rs 4.2 trillion in the previous financial year.