Govt steps in to fight inflation: Excise duty on auto fuels cut sharply

The government on Saturday announced a series of steps to rein in the runaway inflation, which is threatening growth and leading to the rupee’s sharp fall, besides being a burden on consumers. It cut excise duty on petrol by Rs 8 per litre to Rs 19.1 per litre and that on diesel by Rs 6 per litre to Rs 15.8 per litre to give relief to consumers, a move that would cost the exchequer a massive Rs 1 trillion annually.

Additionally, over 90 million beneficiaries of the Pradhan Mantri Ujjwala Yojana will be given a subsidy of Rs 200 per LPG cylinder for up to 12 refills in a year; the revenue impact of the measure is around Rs 6,100 crore a year. The cut in assorted excise levies on auto fuels will straightaway lead to a reduction in state VAT as is levied on a base that includes the Centre’s taxes. Finance minister Nirmala Sitharaman asked state governments, especially those which did not cut VAT rates following the last round of excise cut in November 2021, “to also implement a similar cut and give relief to the common man”.

The minister said the excise cut will reduce the price of petrol by Rs 9.5 per litre and of diesel by Rs 7 per litre (inclusive of the state VAT relief). Prior to the excise cut (which came into immediate effect), of Saturday’s retail petrol price of Rs 105.41 per litre in Delhi, central excise accounted for Rs 27.9 per litre and state VAT, Rs 17.13 per litre.

Prime Minister Narendra Modi tweeted after the FM’s announcements: “It is always people first for us! Today’s decisions, especially the one relating to a significant drop in petrol and diesel prices will positively impact various sectors, provide relief to our citizens and further ‘Ease of Living’.”

These fiscal steps will complement the monetary tightening initiated by the RBI in April meet and via a surprise rate hike on May 5. Retail inflation beat analysts’ expectations and surged to a 95-month high of 7.79% in April on a broad-based rise in price pressure across food, fuel and core segments, bolstering the chances of another round of aggressive rate hike by the central bank in June to break the back of inflation. Wholesale price inflation hit 15.08% in April, the highest since September 1991.

In a series of tweets, Sitharaman said the the government was “committed to ensure that prices of essential items are kept under control”.

“Today, the world is passing through difficult times. Even as the world is recovering from Covid-19 pandemic, the Ukraine conflict has brought in supply chain problems and shortages of various goods. This is resulting in inflation & economic distress in a lot of countries,” she said.

The subsidy on LPG cylinders under the Ujjwala Yojana could help revive the scheme, which was fast unravelling due to skyrocketing cost of the cooking gas after the government stopped giving subsidies in May last year.

Taking cue from the Centre, which reduced taxes on petrol and diesel by Rs 5 per litre and Rs 10 per litre, respectively, effective on November 5, 2021, as many as 22 states and Union Territories had cut their sales tax/VAT rates on the two fuels. Though the state taxes are levied on an ad valorem basis as opposed to the Centre’s specific imposts, the tax cuts by the states/UTs were up to Rs 8.7 per litre for petrol and Rs 9.52 per litre for diesel.

As the retail fuel prices came under pressure due to costlier crude and prices of went past the Rs 100 per litre mark, Prime Minister Narendra Modi on April 27 criticised Opposition-ruled Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala and Jharkhand not reducing tax on petrol and appealed them to cut the duties to benefit the consumers. These state, however, haven’t cut taxes and argued that since it was the Centre which hiked the taxes in the first place, it was incumbent on it to lower the imposts.

While the Centre’s tax revenues from the two fuels surged from Rs 2.25 trillion in FY18 to Rs 3.35 trillion in FY22, a growth of nearly 50% and has remained around Rs 3.35 trillion in FY22 despite a duty cut in November. The states’ revenues from the fuels grew from Rs 1.86 trillion in FY18 to Rs 2.52 trillion in FY22, a growth of 35%.

Aditi Nair, chief economist, ICRA, said, “The welcome reduction in excise duty will help to cool the inflation trajectory going ahead, and complement monetary policy. We project the May 2022 CPI inflation at between 6.5-7.0%. The fiscal cost, while material, can be absorbed by higher than budgeted revenues through other taxes. We now estimate the tax revenues of the (Centre) to surpass the budget estimates by at least Rs 1.3 trillion even after the excise reduction.”

The Indian basket of crude rose from around $83 per barrel in early November to a peak of $128/barrel on March 9, but came down to 107/barrel on May 20.

The weight of “crude petroleum and natural gas” and “fuel & power” subgroup (which includes petrol and diesel) in WPI is 13.15% and 2.41% in CPI. The changes in global crude oil prices have a direct as well as indirect impact on the different components of the WPI and CPI.

The Centre’s tax reveune from fuels jumped 49% between FY18 and FY22 (RE), while states’ tax receipts from these items grew about 31% during the period.

It is estimated that every 10% rise in Indian basket of crude will stoke consumer price inflation by 0.4 percentage points and drag down GDP growth by 0.2 percentage point.

Prior to the latest excise duty cut, the Centre was seen to require to spend an extra Rs 1.8 trillion in aggregate over the Budget Estimate on fertiliser and food subsidies in FY23. Finance secretary TV Somanathan had told FE the additional outgo could be offset by a steep jump in net tax receipts and higher disinvestment revenues.

Somanathan had said that it was too early make any precise estimate of the additional tax receipts in the current financial year, analysts and official sources indicated that the Centre’s tax receipts, net of transfers to the state could be a steep Rs 1.7 trillion higher than the BE of Rs 19.35 trillion.

Total excise duty on petrol was Rs 19.98 per litre in 2019 and Rs 15.83 a litre on diesel. The Centre raised excise duty twice in 2020 to Rs 32.98 per litre on petrol and to Rs 31.83 on diesel. The duty was moderated to Rs 32.90 a litre on petrol and Rs 31.80 on diesel in the FY22 budget. And it was cut by Rs 5 a litre on petrol and Rs 10 per litre on diesel in November last yer after retail prices jumped to record high across the country.

The shareable part of the auto taxes has shrunk in recent years. For instance, while as much as 41% of the Central taxes on diesel were shared with the states under the relevant formula in FY15, just 5.7% is currently being shared with the states.

In recent weeks, a slight fall in crude prices has allowed oil marketing companies to hold prices.

The last increase in petrol and diesel prices was 80 paise/litre on April 6. Between March 22 and April 6, there were 14 hikes, adding up to Rs 10/litre for both petrol and diesel.