RBI Governor bats for cut in State taxes on petrol, diesel

Lending support to the Union government’s pitch for States to reduce sales tax (VAT) on petrol and diesel, Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday said a cut in VAT on fuel will help soften inflationary pressures as well as expectations.

The central government had on May 21 cut excise duty on petrol by a record ₹8 per litre and that on diesel by ₹6 to give relief to consumers battered by high fuel prices that have also pushed inflation to an all-time high. At that time, it asked States to lower VAT to further provide relief. Almost no State reduced VAT.

Announcing the bi-monthly monetary policy, Mr. Das said a quick survey of urban households undertaken after the excise duty cuts on petrol and diesel on May 21 showed a significant moderation in their inflation expectations.

“In such a scenario, further reduction of State VATs on petrol and diesel across the country can certainly contribute to softening of the inflationary pressures as well as expectations,” Mr. Das said.

Finance Minister Nirmala Sitharaman, at the time of announcing a reduction in excise duty, had urged States to reduce VAT. Her other cabinet colleagues including Oil Minister Hardeep Singh Puri made similar pleas.

But hardly any State reduced VAT after the May 21 excise duty cut announcement.

In April, Prime Minister Narendra Modi too had asked the States to lower their taxes to enable users to get the full benefit of the previous excise duty cuts of November 2021. Non-NDA party ruled States had not reduced VAT.

Post-November 2021 reduction in excise duty on petrol by ₹5 per litre and that on diesel by ₹10 a litre, 25 states and UTs had cut VAT to give further reprieve to consumers battered by record-high retail prices.

However, States ruled by non-NDA parties like Maharashtra, Andhra Pradesh, West Bengal, Kerala and Tamil Nadu had not reduced VAT.

“Many states like Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala, and Jharkhand did not agree to our request for some reason or the other, and the burden on the people of these States continued,” Mr. Modi had said on April 27.

“I am urging you that in the interest of the nation, please undertake what should have been done six months back in November. Give consumers in your State the benefit by lowering the VAT.”

For a nation 85% dependent on imports to meet its oil needs, the surge in international crude oil prices following Russia’s invasion of Ukraine, together with food and commodities, has contributed to pushing the inflation rate to 7.8% in April.

To control the spiralling prices, the Union Government reduced excise duty.

The two reductions — first in November 2021 and then in May 2022 — roll back the ₹13 and ₹16 per litre increase in taxes on petrol and diesel effected between March 2020 and May 2020 to avoid passing on to consumers the sharp fall in international oil prices.

The excise duty hikes of 2020 had taken central taxes on petrol to their highest level of ₹32.9 per litre and that on diesel to ₹31.8 a litre.

After the latest excise cut, the incidence of central tax on petrol came down to ₹19.9 a litre and that on diesel to ₹15.8 per litre.

Central excise duty makes up for 20% of the price of petrol, down from 26% earlier. It now makes up 17.6% of diesel price. After considering local sales tax or VAT, the total tax incidence on the price of petrol is 37% and that on diesel is 32%, down from 40-42% earlier.

The excise tax on petrol was ₹9.48 per litre when the Modi government took office in 2014 and that on diesel was ₹3.56 a litre.

The government had, between November 2014 and January 2016, raised excise duty on petrol and diesel on nine occasions to take away gains arising from plummeting global oil prices.

In all, duty on petrol rate was hiked by ₹11.77 per litre and that on diesel by ₹13.47 a litre in those 15 months that helped government’s excise mop up more than double to ₹2,42,000 crore in 2016-17 from ₹99,000 crore in 2014-15.

It cut excise duty by ₹2 in October 2017 and by ₹1.50 a year later. But it raised excise duty by ₹2 per litre in July 2019.

It again raised excise duty on March 14, 2020, by ₹3 per litre each. The government on May 6, 2020, again raised excise duties by ₹10 per litre on petrol and ₹13 per litre on diesel.