The Centre increasing the excise duties on petrol (by ₹10 a litre) and on diesel (by ₹13 a litre) is along expected lines. A cash-strapped government reeling from the economic hit due to Covid-19 has again tapped into its time-tested cash cow — the petroleum sector.

This is the second hike in the excise duty on these fuels in less than two months; the Centre had earlier raised the duty on petrol and diesel by ₹3 a litre on March 14. The Centre is trying to make up by higher tax rates what it is losing in volumes due to the crash in demand for these fuels as a result of the ongoing lockdown.

Going by the ₹39,000-crore annual revenue the Centre hoped to garner with the ₹3 a litre hike in March, the expected annual collection from the recent hike could be about ₹1.5-lakh crore. But the collection in FY21 will likely be lesser than this due to lower volumes during the year.

Taxing times

With the latest hike, the excise duty on petrol is now ₹32.98 a litre and that on diesel is ₹31.83 a litre. That’s about half the retail selling price of these fuels in many cities. To put it in perspective, in January 2014, the excise duty on petrol was ₹9.48 and that on diesel was ₹3.56 a litre. So, excise duty on petrol has increased about 250 per cent over the past six-and-a-half years, and that on diesel has rocketed nearly 800 per cent.

Not just the Centre, some States have also hiked their taxes on petrol and taxes in recent days, and others will likely follow suit soon. Karnataka, for instance, had increased the VAT on petrol and diesel by 3 percentage points, applicable from April 1. Nagaland introduced an additional levy of ₹5-6 a litre on diesel and petrol in April-end.

A couple of days back, Tamil Nadu changed the structure of its VAT on these fuels from a pure ad valorem tax rate to a combination of ad valorem and fixed tax; this could mean a hike of ₹2.5-3.25 a litre in the price of diesel and petrol in the State. Also, Delhi increased the VAT on petrol from 27 per cent to 30 per cent and that on diesel from 16.75 per cent to 30 per cent — this led to an increase in the price of petrol by ₹1.7 to ₹71.26 a litre, and that on diesel by ₹7.1 to ₹69.39 a litre.

The States were quick to hike or recalibrate their VAT rates because they faced a double-blow — one, due to decline in petro-product volumes and two, due to possible decline in product prices which will reduce their ad valorem (percentage of price) collections.

Together, with the recent hikes, Central excise duties and State VAT now account for about 70 per cent of the retail prices of prices of petrol and diesel in States such as Delhi.

Big contributor to exchequer

The petroleum sector has for long been a cash cow and is more so now. About 92 per cent of the Centre’s excise duty receipts in FY19 came from the petro sector. The Petroleum Planning and Analysis Cell (PPAC) says that 20 per cent of the Centre’s revenue receipts and 8 per cent of the States’ revenue receipts in FY19 came from that sector.

The sector contributes to the exchequer in many ways — including excise duty, sales tax/VAT, cess on crude oil, royalty on crude oil/natural gas, customs duty, NCCD on crude oil, GST, octroi, entry tax and other duties. Besides, oil and gas companies pay income-tax, dividends, dividend tax and profit petroleum on oil/gas exploration to the government.

Excise hike adjustment

Thankfully, unlike the VAT increase by the States, the recent sharp increase in excise duty by the Centre will not result in a spike in the prices of petrol and diesel. That’s because the excise duty hike will be adjusted against the marketing margins of the public sector oil marketing companies (Indian Oil, HPCL and BPCL) that sell these products.

Note that despite the massive crash in crude oil prices over March and April 2020, petrol and diesel prices in India remained unchanged since March 16 this year. This is despite the daily-pricing mechanism that should have ideally translated into pump prices falling with the crash in oil prices. But the oil marketing companies — likely on the Centre’s nudge — kept the prices of petrol and diesel unchanged. This would have meant a sharp jump in their marketing margins. This could have offset, to some extent, the hit that the oil marketing companies would be taking with the volume dip and inventory losses due to the oil price crash.

It could also have been that the Centre, through the oil companies, was trying to marshal financial resources to fight the Covid-19 impact. But now, the Centre has chosen to appropriate the benefit directly through the excise duty hike. So, the marketing margins of the oil marketing companies will come down sharply. That’s a reason why the stocks of Indian Oil, HPCL and BPCL are down 3-5 per cent in today’s trade compared with the about 1 per cent rise in the BSE Sensex.

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