Rising fuel prices can give windfall gains of Rs 22,700 cr to states: Report

The surge in petrol and diesel prices can give windfall gains of around Rs 22,700 crore during the current fiscal, according to a report by the Economic Research Wing of SBI, released on Tuesday.

“We also estimate that since the states have an incremental revenue over the budgeted one, they could cut on average petrol prices by Rs 3.20 /litre and diesel by Rs 2.30/ litre, without affecting their revenue arithmetic,” the report, authored by Soumya Kanti Ghosh, Group Chief Economic Adviser of State Bank of India, said. The report has come at a time when the Modi government is facing harsh criticism on the fuel price situation.

Fuel comes under the dual taxation system. While the Centre levies excise duty at specific rates, which are Rs 19.48 a litre for petrol and Rs 15.33 a litre for diesel, states impose sales tax/VAT at ad valorem as well as specific rates, besides cess (in some states only). The sales tax on petrol varies from 6 per cent (Andaman & Nicobar Island) to 39.12 per cent (Maharashtra – Mumbai, Thane & Navi Mumbai). Similarly, sales tax on diesel ranges from 6 per cent (Andaman & Nicobar Island) to 28.08 per cent (Andhra Pradesh). Since states have ad valorem rates i.e. certain percentage of value, and it is calculated on the base price plus excise duty, there is a possibility of windfall gains for states.

The report said since March, petrol and diesel prices have increased by Rs 5.60 and Rs 6.31 respectively in Delhi. The price of petrol has now crossed Rs 89 a litre in Maharashtra (highest). “This increase in petrol and diesel prices is likely to give states windfall gains of around Rs 22,700 crore over and above the budget estimates for the current fiscal. Alternatively, a $1/barrel increase in oil prices translates, on average, to a Rs 1,513-crore revenue gain for all the major 19 states,” it mentioned.

This windfall gain will have a positive impact on state finances, which might push down the states’ fiscal deficit by 15-20 bps (100 bps or basis points equal to 1 per cent) provided other things remain unchanged. It is believed that that states such as Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu, Andhra Pradesh, Rajasthan and Karnataka have the privilege to cut petrol prices by at least Rs 3 from their existing rates and Rs 2.5 on diesel. The report noted that a cut by Rajasthan and Andhra Pradesh has already pared rates.

The report recommend that if the states impose VAT on base price (crude oil+ transportation cost+ commission), then diesel prices could drop by as much as Rs 3.75 and Rs 5.75 for petrol. However, this will result in a revenue loss of around Rs 12,000 crore (net of Rs 34,627 crore loss and Rs 22,700 crore gain from oil bonanza) to the states. “The problem with the states is that even as many have a revenue surplus, they are using the surplus revenue to finance capital expenditure and interest obligations,” it said.