The record hike in excise duty on petrol and diesel is likely to shore up the Union government’s revenue by anywhere between Rs 1 trillion and Rs 1.6 trillion, depending on the severity of consumption decline because of weak economic activity amid the Covid-19 pandemic.
The fuel consumption is estimated to decline 10-20 per cent during fiscal year 2020-21 (FY21).
State Bank of India Chief Economic Adviser Soumya Kanti Ghosh pegs the Centre’s gains at Rs 1 trillion, assuming the fuel consumption declines by 20 per cent. The steep duty hike, he said, would make up for the losses incurred in the month of April and May.
“The duty hike will neutralise the revenue loss on account of oil for the month of April and May, which stood in the range of Rs 80,000-90,000 crore,” said Ghosh. Barclays estimates the duty hike will likely add Rs 1.4 trillion to the government’s kitty. It, however, assumes the consumption will fall by 12 per cent in FY21.
Moody’s Investors Service has estimated that the hike will result in the government’s tax collection increasing by about $21 billion (Rs 1.59 trillion), if it is maintained for the full year.
Aditi Nayar, principal economist, ICRA said the expected moderation in demand for fuels in the post-Covid landscape would partly limit the positive impact of the change in duties on petrol and diesel on the revenues of the government of India.
“Nevertheless, there would be substantial gains to the central government from this source, which would help absorb the expected shortfalls in other indirect and direct tax revenues,” said Nayar.
The decision to hike excise duty was taken to overcome the tight fiscal situation while making use of the recent decline in global oil prices to insulate consumers from the impact of higher levies. After the latest hike, excise duty on petrol has gone up to Rs 32.98 per litre from Rs 22.98 a litre and that on diesel to Rs 31.83 from Rs 18.83 a litre. Even though the government has missed the revised revenue collection estimates for FY20, the targets for the current fiscal year still appear enormous and will require sharp scaling down.
The Centre had increased excise duty in March, too. States are facing similar fiscal challenges and have been increasing their levies. Uttar Pradesh increased the value added tax (VAT) on petrol and diesel by Rs 2 and Rs 1 a litre, respectively, effective from Wednesday.
Other states that have increased VAT are Delhi, West Bengal, Rajasthan, Meghalaya, Maharashtra, Karnataka, Tripura, Goa, Tamil Nadu and Arunachal Pradesh, Assam, Nagaland and Haryana.
According to the revised estimates for FY20, taxes from auto fuel account for 12.18 per cent of the total indirect tax collections. The government had revised the collection target from taxes on petrol and diesel to Rs 1.2 trillion from Rs 1.68 trillion estimated earlier for FY20. The Centre in a notification issued on Tuesday night hiked duties on petrol and diesel by Rs 10 and Rs 13 a litre, respectively.
Road and infrastructure cess was hiked by Rs 8 each for petrol and diesel, and a special additional excise duty (SAED) was hiked by Rs 2 and Rs 5, respectively. While the Rs 8 hike will only go into the Centre’s coffers, the hike on account of SAED will be passed to states through devolution at 42 per cent.
As a result, states will get only Rs 0.84 a litre in case of petrol and Rs 2.1 in case of diesel. Amid falling international crude oil prices, the Union government in March introduced an enabling provision to hike excise duty on petrol and diesel by Rs 8 per litre in future in the Finance Act. It had, on March 14, raised excise duty on petrol and diesel by Rs 3 a litre each, which would help raise an additional Rs 39,000 crore in annual revenue.
This March duty hike included Rs 2 a litre increase in SAED and Rs 1 in road and infrastructure cess. This hike took the SAED to the threshold level of Rs 10 for petrol and Rs 4 for diesel. The limit has now been increased to Rs 18 a litre in case of petrol and Rs 12 in case of diesel by way of an amendment to the Eighth Schedule of the Finance Act.