By K R Sudhaman
On the eve of Deepavali, the Union government in a masterstroke cut excise duty on petrol and diesel by Rs 5 and Rs 10 respectively to bring some relief to consumers hit hard with their prices surging beyond Rs 100 per litre. Close on the heels 22 BJP ruled states and union territories cut VAT accordingly, bringing in additional relief. Until now excise on petrol and diesel has been a milch cow as both Centre and states have garnered over Rs 6 lakh crore annually by way of taxes. With revenue buoyancy following life returning to normal after Covid, the government has realized it is time to reduce taxes on these two vital commodities and this reduction is seen by political pundits as a prelude to bringing the two commodities under Goods and Service Tax early next year, ahead of assembly polls in Uttar Pradesh. This will help to bring down prices of petrol and diesel around Rs 75 a litre so that oil prices and inflation do not become an election issue, so as not to give a handle to opposition parties.
There is an economic sense as well. The unprecedented oil prices, particularly for diesel, have a cascading effect on prices, thereby pushing up inflation, which is already on the rise impacting people particularly in the lower strata of the society. They are already suffering due to job losses in the wake of covid.
There are reports to suggest the GST Council may take up this issue in January next, well in time before the assembly elections. Five states are going to polls including Uttar Pradesh, Punjab and Goa in early part of the year while two other states, Gujarat and Himachal Pradesh, in the latter part of the year. In all these states BJP has a stake in the assembly elections and it may not want prices, particularly diesel and petrol, to become a poll issue.
During Covid government needed to mop up additional revenue as some of the other areas dried up due to lock down. Now with the revenue buoyancy, the government will be able to tide over Rs one lakh crore forego due to reduction in excise. This loss of revenue will not impact fiscal deficit as well. That’s one of the reasons GST council is likely to take a call around the general budget on February 1. With most of the states ruled by BJP, it would not be difficult to get the GST Council to pass this proposal as only two-third majority is required. The Centre already has one third votes and all the states put together two thirds of the votes.
Three states which are vehemently opposing the move to bring petrol and diesel under GST are West Bengal, Tamil Nadu and Kerala. All these states are opposition-ruled. They feel that with the introduction of GST, the states’ discretionary power on state taxes will be further reduced. Among the three, Tamil Nadu has slightly sobered down its stance saying if cess on petrol and diesel goes away, then it is not averse to bringing petrol and diesel under GST. The problem with cess is that the entire revenue accrual goes to the Centre and states do not get any devolution. Excise formed part of divisible pool of taxes under finance commission recommendations but not cess.
With the economy fast returning to normal and industrial activity picking up, GST collections have been increasing day by day. There is a growth of revenue of 20-30 per cent in GST collections in the last few months. Also more industrial activities are coming under GST net with gradually informal economy becoming formal with increased digitization. As a result, the GST collections can only grow in coming months and years, giving that much head room to make up for the revenue loss with the withdrawal of excise and state VAT on petrol and diesel.
A further cut in petrol and diesel prices will also help in boosting the economy by stepping up demand and freight charges too will come down for movement of goods. The middle class too, whose budget had been hit due to covid, will be happy with the reduction as it gives them some cushion and comfort in their expenditure.
The increase in petrol price since May 2020, when the Centre raised excise duty to record levels, had totalled Rs 38.78 per litre. Diesel rates went up by Rs 29.03 per litre. Based on April to October consumption numbers, the loss of revenue to the government due to the excise duty cut will be Rs 8,700 crore per month. This totals to an annual impact of over Rs 1 lakh crore, industry sources said. For the remainder of the current fiscal, the impact would be Rs 43,500 crore. This can be easily made up without impinging upon fiscal deficit due to revenue buoyancy.
Data from the Controller General of Accounts (CGA) showed excise duty collections during April-September 2021 surged to over Rs 1.71 lakh crore, from Rs 1.28 lakh crore mop-up in the same period of the previous fiscal. For the full 2020-21 fiscal, excise collections were Rs 3.89 lakh crore and Rs 2.39 lakh crore in 2019-20, the CGA data showed. After the introduction of the Goods and Services Tax (GST) regime, excise duty is levied only on petrol, diesel, ATF and natural gas. All other goods and services are under the GST regime.
Even when crude oil prices shot up to $147 a barrel during UPA regime, petrol and diesel prices were less than half of what they are now. The oil bonds issued then to absorb the increase in crude oil prices have already been paid back by 2017-18 when crude oil prices were as low as $25 a barrel. Now there is no justification for keeping petrol and diesel prices so high when crude oil prices were just around $75 a barrel. This huge collection in revenue from just one source during covid was partly understandable due to increased government expenditure on health care and falling tax revenue in other areas due to lockdown. The government too had to spend more money on social schemes, including that of providing free ration to millions of additional people rendered jobless. Bringing them under GST will rationalise the tax structure on these commodities apart from bringing much needed relief to consumers. This will also help in further revival of the economy. (IPA Service)