The sharp hike in excise duty for auto fuels – petrol and diesel – is likely to add Rs 1.4 trillion to the government’s kitty, says the latest report by Barclays. The projection assumes that demand for both petrol and diesel will fall 12 per cent in FY20-21 as the economic activity in the country gets hampered on account of the Covid-19 related shutdown.
Apart from the increase in central government taxes, several states and union territories, including Delhi, Haryana, Assam, Punjab, also have raised the state tax on fuel. This is likely to result in a modest rise in fuel prices to rise modestly, given that the increase in the government’s tax should not lead to higher fuel prices owing to the significant drop in crude oil costs through April.
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“We estimate the central government’s revenue benefit from the additional hikes in fuel taxes could be as much as Rs 1.4 trillion (0.67 per cent of GDP) on an annual basis. This is on top of an estimated Rs 2.8 trillion already being collected by the central government from the fuel tax/cess, which would bring the total contribution to central exchequer from fuel taxes to Rs 4.4 trillion (around 2.1 per cent of GDP).
Prior to the first increase in excise duty as of February 16, 2020, the government, (Centre plus States) were collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel, according to CARE Ratings. This tax collection, according to the rating agency, rose to 134 per cent (Excise Duty and VAT) on the base price of petrol and 88 per cent in the case of diesel (as on March 16, 2020).
“Now with the second revision in excise duty, the government will be able to collect around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on May 6, 2020),” wrote Madan Sabnavis, Chief Economist at CARE Ratings in a co-authored report with Urvisha H Jagasheth, an analyst at the rating agency.