With petrol and diesel prices having crossed the three-digit mark, the clamour had risen for a reduction in central and state taxes on these products. The Centre has obliged by cutting ₹5 on a litre of petrol and ₹10 on diesel with effect from Thursday. But the question is, whether these prices should be reduced at all.
The most common reason advanced in favour of a tax cut is that it affects the common man. But since vehicle owners are not poor, does the government need to come to their rescue by slashing taxes on fuel? When individual owners incur this expenditure, commercial vehicle owners pass it on to their customers.
Through excise duties, the Centre collected ₹1,01,598 crore on petrol and ₹2,33,296 crore on diesel during 2020-21. State-level taxes vary from State to State.
Petroleum Minister Hardeep Singh Puri informed the Lok Sabha that revenue collected from these taxes and cesses is used in various developmental schemes of the Centre. He said that over the last seven years, length of national highways have gone up by 50 per cent from 91,287 km (as on April 2014) to 1,37,625 km (as on 20 March 2021).
So the proceeds of this excise duty is used for infrastructure and agriculture, which benefits the common man. Any drop in central excise collection will hit this development.
Many non-BJP rules States blame the Centre for higher central excise duty. But these States are not in favour of bringing petro products under GST. There is already an enabling provision in the GST scheme of things to have petrol and diesel under GST regime. Only rate has to be decided by the GST Council. The government has set a target of becoming a $5-trillion economy by 2030, for which massive infrastructural funding will be needed. For this taxes on petrol and diesel are inevitable. Also tax evasion is almost impossible here. If the government reduces taxes on petrol and diesel, it has to find other avenues for taxation.
Our country imports more than 80 per cent of the crude oil we process. Our crude oil import bill soared nearly threefold in the first quarter of the fiscal (Q1FY22) fuelled by a sharp rise in global oil prices, causing concern for policymakers. The fuel import bill totalled about $24.7 billion in the three months ended June 30, compared with $8.5 billion a year earlier, according to official data.
Hence the present increase in petrol and diesel prices is on account of increase in global prices, which we cannot control. This is import induced inflation. By reducing taxes, the inflation cannot be eliminated, as there are other factors fuelling it.
Push green energy
This inflation can be tackled only by increased productivity and reduced consumption of crude, alternatively by using green energy. Keeping the petrol and diesel prices higher will reduce consumption and encourage faster adoption of electric vehicles.
The pandemic has restricted movement of people and has also put pressure on the health infrastructure. But it has not destroyed the productive capacity of the nation as in the case of any natural calamity. It is true that our supply chain was affected. But once normalcy is restored, our productive capacity will start increasing.
Nobody knows the effect of inflation on actual GDP growth. We do not even know what the optimum inflation rate is, though the RBI has been mandated to keep a rate of 4 per cent with plus or minus two per cent. Anyway, inflation on account of import of crude cannot be eliminated by reducing taxes on petrol and diesel and taxing some other item to compensate the same. It is for RBI to use the tool of monetary policy to keep inflation at the desired level.
So the government has no option but to tax fuel to garner revenues for infrastructure funding to spur long-term growth. Green energy should also be expedited.
The writer is a retired banker