Central oil tax-tweak cloud on state earnings

The tweak in the tax structure for petrol and diesel could deal a blow to earnings of the state governments and further strain their fiscal situation.

By R. Suryamurthy and Sambit Saha
  • Published 2.02.18
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Amit Mitra

New Delhi/Calcutta: The tweak in the tax structure for petrol and diesel could deal a blow to earnings of the state governments and further strain their fiscal situation.

The Narendra Modi government introduced road and infrastructure cess of Rs 8 per litre while abolishing additional excise duty of Rs 6 and slashing basic excise duty on petrol and diesel by Rs 2 each. It also imposed cess of similar amount on imported petrol and diesel while reducing customs duty by an equal measure.

As a result, the rejig will not impact the pump prices of the fuel but it will considerably shrink states' share of taxes from central coffers because of the mathematics associated with it.

According to the Finance Commission formula, around 42 per cent of Centre's earnings from excise duty, additional excise duty and customs duty is shared with the states. However, the cess imposed by the Centre goes straight into its kitty.

The blow will be brutal for debt-laden states like Bengal that heavily depend on funds from the central pool to meet their development agenda as well as pay salaries and wages.

Hasmukh Adhia

In the state budget presented on Wednesday, Bengal finance minister Amit Mitra revealed that the share in central taxes and grants-in-aid contribute nearly 59.9 per cent of the total revenue receipt of Rs 133,034.08 crore of the state.

If the central kitty shrinks because of the reclassification of tax structure of petrol and diesel - two most trusted sources of generating revenue without leakage - states like Bengal will be forced to ramp up own tax revenue or borrow more from the market, increasing indebtedness. Alternatively, the states will have to slash development expenditure.

There were expectations that Jaitley would cut excise duty on petrol and diesel for the second time this year, coming on top of the reduction announced last October. The Modi government had raised excise duty on petrol and diesel nine times between November 2014 and January 2016, sucking out the gains arising from plummeting global oil prices.

"We are already on the cusp, in terms of oil prices. If the future demands, we may consider slashing excise duty on petrol and diesel," finance secretary Hasmukh Adhia said.

With crude oil price inching towards $70 a barrel, the petroleum ministry had earlier sought the intervention of the finance ministry to cut excise duty on petrol and diesel in the budget.

In all, duty on petrol was hiked by Rs 11.77 per litre and that on diesel by 13.47 a litre in those 15 months, which helped the government's excise mop-up to more than double to Rs 2,42,000 crore in 2016-17 from Rs 99,000 crore in 2014-15.

Every $1-per-barrel-rise in crude oil prices inflates India's import bill by $1.33 billion, which can potentially put a downward pressure on the domestic currency. India's import bill rises by $1.03 billion for every Re 1 weakening in the dollar exchange rate.

The spike in crude prices would lead to a huge increase in the oil import bill. In the current fiscal, import bill is projected to go up to nearly $90 billion from $72 billion in the last fiscal, and an even lower $64 billion in 2015-16.

The move comes at a time petrol in Calcutta is being sold at Rs 75.74 per litre and diesel at Rs 66.78 per litre.