India has cut special excise duties on petrol and diesel, in a bid to ease pressure on state-run oil marketing companies grappling with elevated global crude prices — a move that is set to widen fiscal strains even as it seeks to cushion domestic consumers.
The finance ministry issued a notification late on Thursday night reducing the special excise duty on petrol and diesel by ₹10 a litre. With this rejig, SED on petrol now stands at ₹3 per litre while the said duty on diesel goes to zero.
Simultaneously, it imposed a windfall tax of a ₹21.5 per litre on exports of diesel and ₹29.5 a litre on aviation turbine fuel, which the government said was aimed at encouraging domestic availability of the fuel. None of the changes will impact the retail prices at the pumps at the moment.
Economists say the impact of tax cut could be in the range of ₹1.5 lakh crore hit on the exchequer if rates remain at this level for the entire year, weakening the finance of the central government.
Commenting on the tax rejig, finance minister Nirmala Sitharaman said in a post on X that the tax cut would “provide protection to consumers from the rise in prices”, while the imposition of tax on exports “will ensure adequate availability of these products for domestic consumption”.
Oil minister Hardeep Singh Puri said retail prices at the pump has gone up everywhere in the world in the last one month. Faced with the choice of doing the same in India and protecting the consumers, it “decided to take a hit on its own finances again to safeguard the Indian citizen”.
“(The) government has taken a huge hit on taxation revenues to ensure very high losses of oil companies (approximately ₹24/litre for petrol and ₹30/litre for diesel) at this time of sky-high international prices are reduced. At the same time, export tax has been levied as international prices of petrol and diesel have skyrocketed and any refinery exporting to foreign nations will have to pay export tax,” Puri posted on X.
India is the world’s third-biggest oil importer and consumer and imports most of its fuel. Due to its dependence on West Asian barrels and low reserve, India has emerged relatively more vulnerable compared with other emerging economies. India’s import basket of crude oil has risen to $123.15 a barrel for March compared with $69.01 a barrel in February.
Revenue maths
The special excise duty cut on petrol and diesel and imposition of a special additional excise duty on export of ATF and diesel would result in a net revenue loss of ₹7,000 crore in a fortnight, India’s indirect tax chief said later. The rates will be reviewed on a fortnightly basis, Vivek Chaturvedi, chairman of the Central Board of Indirect Taxes and Customs (CBIC), said.
“The situation is dynamic, it is not business as usual where you would have a predictability that certain metric tonnes of goods will come. We are living in difficult times. Any (revenue) implication will have to factor in actual supply of goods coming into the country,” Chaturvedi said.
According to Prashant Vashisth, vice-president and co-group head, corporate ratings at Icra Ltd, the duty cut will provide ‘a meaningful relief to the oil marketing margins of oil marketing companies’.
“However, the excise duty cuts are likely to have a significant fiscal implication. Based on current consumption trends, we estimate the annualised revenue foregone by the government to be in the range of ₹1.5–1.6 lakh crore,” Vashisth said in a note.
Given that the SED has been cut, the hit will be borne by the Centre as states do not get a share from this pool of revenue. The export duty imposition will impact two companies in particular, Reliance Industries Ltd and Russian owned Nayara Energy, who import crude oil and re-export finished petroleum products like petrol, diesel and ATF.
Political slugfest
While central ministers were quick to credit Prime Minister Narendra Modi for his effort to protect domestic consumers, Opposition leaders warned the respite could be short lived.
“One will have to see what the government does when elections are over in 5 states,” Supriya Shirnate, chairperson of social media and digital platforms of Congress, said, arguing the duty rejig is to protect oil companies, not consumers. The last date of state election is April 29 when the second phase of Assembly poll will take place in Bengal.
She pointed out that the government also did not bring down retail prices when international crude oil prices came down.
“In the last 12 years the Modi govt has raised excise duty on petrol and diesel 14 times, and mostly under special and additional category and cess which is not shared with the states,” Shirnate said.
She likened the tax cut with oil bonds floated by the UPA government to protect the consumers against rising international crude oil prices.