Petrol Prices to Stay High: Here's Why State Govts Can't Bring Relief

Since GST has come into the picture, the ability of the state governments to earn taxes has gone down.

Petrol and diesel prices have been on fire for a while now, with petrol selling for more than Rs 100 per litre across large parts of the country.

There are two major reasons for this. First, the rise in oil prices, over the last one year. Second, the massive increase in central excise duty on petrol and diesel, over the last one year. Let’s look at these reasons in detail.

In July 2020, the price of the Indian basket of crude oil averaged at USD 43.35 per barrel. On 14 July, 2021, the price was USD 75.26 per barrel. India imports more than four-fifths of the oil that it consumes and hence, any increase in the oil price internationally, leads to an increase in retail prices of petrol and diesel.

Why Petrol & Diesel Prices Have Been Rising

In early May 2020, the central excise duty on petrol was increased from Rs 22.98 per litre to Rs 32.98 per litre. When it came to diesel, the excise duty was increased from Rs 18.83 per litre to Rs 31.83 per litre. From 2 February this year, excise duty on petrol and diesel was decreased by a few paisa to Rs 32.90 per litre and Rs 31.80 per litre, respectively.

This has pushed up the retail price of both petrol and diesel.

Along with the central excise duty, different state governments charge VAT or sales tax (the terminology differs across states) on every litre of petrol and diesel sold. This rate varies from state to state, and it adds to the retail price of both the fuels.

Let’s look at the following chart. It plots the total amount of taxes collected by the central government and the state government through the central excise duty and the value added tax (VAT)/sales tax on petroleum products (primarily petrol and diesel) over the years.

It was at Rs 99,068 crore in 2014-15 and it had jumped to Rs 3,71,726 crore in 2020-21. The jump between 2019-20 and 2020-21 was around 67%. This happened in the middle of the covid pandemic. The state government sales tax/VAT on petroleum products has gone up from Rs 1,37,157 crore to Rs 2,02,937 crore during the same period. As can be seen, it had been largely flat over the last few years.

Increase in Taxes = Increase in Fuel Tariffs

The major reason for this lies in the fact that the central government taxes on petrol and diesel have gone up. The central government tax on diesel has gone up from Rs 4.50 per litre in 2014-15 to Rs 31.80 per litre currently. This is a rise of 607%.

When it comes to petrol, the central government tax has gone up from Rs 10.39 per litre in 2014-15 to Rs 32.90 per litre now, a rise of 217%. This has led to a massive increase in tax collections from sale of petroleum products at the central government level.

In fact, between 2014-15 and 2020-21, the size of the Indian economy has increased. We need to adjust for this while comparing the central government revenues with that earned by the state governments.

How do things look once we do that?

Take a look at the following chart which plots the ratio of the central excise duty to GDP and sales tax/VAT to GDP.

The sales tax or VAT earned by state governments from petroleum products has remained largely flat between 2014-15 and 2020-21. It was at 1.1% of the GDP in 2014-15 and at 1% of the GDP in 2020-21.

As far as the central government excise duty to GDP ratio is concerned, it has gone from 0.8% of the GDP to 1.9% of the GDP during the same period. This has led to higher pump prices for petrol and diesel.

The central government seems to be in no mood to cut the excise duty. The finance minister Nirmala Sitharaman recently said that: “State governments can give relief by reducing taxes or levies on petrol.”

State Govts In No Position to Cut Sales Tax/VAT

But how fair is that?

As we can see from the above chart, the taxes state governments earned through the sales tax or VAT, on petroleum products have more or less stayed constant and in line with the size of the economy.

Meanwhile, the excise duty earned by the central government has more than doubled, even after adjusting for the size of the economy.

Also, it needs to be mentioned here that since the Goods and Services Tax (GST) has come into the picture, the ability of the state governments to earn taxes has gone down. So, state governments are in no position to cut the sales tax or VAT on petrol and diesel.

The central government has ended up in this situation primarily because corporate tax collections have collapsed from 3.5% of the GDP in 2018-19 to 2.3% in 2020-21. This is because in September 2019, the base corporate tax rate was cut to 22% from the earlier 30%.

Basically, the central government now is totally dependent on excise duty on petrol and diesel, in order to compensate for the drop in corporate taxes.

Which is why in all its public communication to drive the right narrative, it has been blaming high oil prices for the rise in the pump prices of petrol and diesel. While high oil prices are to blame, the higher central excise duty is also responsible for the prevailing situation.

(Vivek Kaul is the author of ‘India’s Big Government – The Intrusive State and How It is Hurting Us’. He can be reached @kaul_vivek ‏. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)