India levies one of the highest taxes on petrol and diesel in the world. In fact, the Central Government took advantage of the lower International fuel prices during last year because of global lockdown and increased taxes to match retail prices. State Governments took cue from this move and increased sales tax as well.
However, post removal of lockdowns and production restrictions announced by OPEC, prices started inching upwards to pre-pandemic levels. In spite of that, both the Central & State Governments have resisted any move to reduce the taxes leading to highest ever retail prices across India. There is also call from various quarters regarding inclusion of fuel under GST regime so as to have fixed tax rates as well as businesses can benefit out of input tax credit.
With recent announcements by OPEC to increase production and some softening of Internal fuel prices, oil companies have now freezed further retail price increase but are in wait & watch mode and not decreasing the retail prices yet. There’s a lot of hue & cry around high fuel prices going around the country since last few months.
While this is a major policy shift from subsidising fuel to minting maximum taxes out of it, before understanding the benefits to the nation, lets understand the facts first:
1. The tax collected on the retail price of petrol and diesel in India has increased by 459 per cent in seven years, according to oil minister's written reply in Lok Sabha. Estimated total excise duty collections on petrol and diesel stand at Rs 3.9 lakh crore in 2020-21, a 77% jump from the previous year’s Rs 2.2 lakh crore. This, even as total petrol and diesel consumption during the year contracted by 10.6%, impacted as they were by lockdowns enforced to contain the pandemic.
Source: The New Indian Express
2. According to a Crisil report, sales tax revenue for states is expected to increase 30 per cent this fiscal from FY20 levels, even as fuel volume remains 2-3 per cent lower than the pre-pandemic levels.
3. The government's total tax collection in the April-June 2021 quarter grew about 86 per cent to more than Rs 5.57 lakh crore, as informed to Parliament. Out of the total amount, collection of net direct tax stood at Rs 2.46 lakh crore and of indirect tax was at Rs 3.11 lakh crore. The excise duty on petrol and diesel fetched Rs 94,181 crore in Q1.
4. Icra Ratings said the government is set to exceed the budgeted tax collection target of Rs 22.2 lakh crore for 2021-22, led by indirect taxes. According to the report, Q1 tax collections is a full 39 per cent more than the pre-COVID level in Q1 of FY20. The report further said while corporation tax, personal income tax and Central GST receipts in Q1 stood at 21-22 per cent of the budget estimates, excise and customs collections already crossed 30 per cent of the budget estimate, boosted by the high taxes on fuels as well as a relatively faster recovery in international trade.
5. With easing of the second wave restrictions as well as faster pace of vaccinations, it is expected that economy shall normalise with the start of festival season from this month onwards. Based on that as well as normalisation of mobility situation, it is expected that excise duty collections on fuel shall be near Rs. 5 Lakh crores at the end of FY 22. This is a sizeable tax collection and sets ground for further tax reforms.
Now let’s discuss the impact this would have on overall tax collection and why it is right time to reform the taxation regime:
1. This is the first tax in the country, which has a standard & fixed rate across classes of users (of course, different States have varied sales tax on fuel, but the difference is marginal compared to total retail price of fuel) unlike GST where there are different slabs.
2. Further, this is the first tax which is completely democratic & secular in nature, affecting all classes of society, irrespective of their social or cultural strata and applies uniformly to all. Of course, there is a choice available to users to refrain from using fuel.
3. There’s a call for inclusion of fuel taxes under GST. However, Central Government would never agree to it because they shall have to part with the taxes, which currently in form of Excise are going completely in their pocket. On the other side, States would never agree to it as post implementation of GST, sales tax on fuel is one of the largest contributor to States’ direct income along-with taxes on liquor and in today’s context contributes more than 60% of its direct income. With delayed GST compensation payment and other issues, no State would like to forego this large amount of direct income. So, all said & done, neither party is interested in it.
4. On the other side, higher taxes on fuel would incentivise users to adapt to alternative sources energy at a faster pace. This would give rise to faster adoption of renewable energy solutions like E-vehicles, solar energy parks, wind mills, etc. making climate friendly choice. In fact, there’s also a flip side of some industries moving to coal rather than mineral oil for energy usage.
5. It would also make people healthy as pinched by higher fuel prices, many people may switch to walking / cycling as a means of mobility, making them healthier at the end.
6. This would anyhow reduce our imports to significant extent.
With around Rs. 5 Lakh crores tax revenue from fuel and around Rs. 15 Lakh crores GST collection estimated for FY 22, it is high time, the Government rationalises direct taxes. While reduction of corporate tax from 22-25% was a welcome move last year, biggest pain point remains around personal income tax. Shall discuss about that in next post.
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