Petrol, Diesel Set To Get Cheaper As Centre Cuts Excise Duty

A man refuels a vehicle at a petrol pump, New Delhi. (Prashanth Vishwanathan/Bloomberg)

Written by
Azman Usmani
Written by

Azman Usmani

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The government reduced the basic excise duty on petrol and diesel by Rs 2 per litre as it looks to cushion the impact of rising crude prices.

The reduction, applicable on both branded and unbranded fuel, will come into effect from October 4, the Central Board of Excise and Customs said in a media statement. “This has been done to cushion the impact of rising international prices of crude petroleum oil,” the CBEC said.

The duty cut will cause a revenue loss of about Rs 26,000 crore for the full year, and Rs 13,000 crore in the remaining part of the ongoing financial year, the statement said.

The cut in excise duty will reduce inflation, and in turn, help revive demand in the economy, Upasana Bharadwaj, economist at Kotak Mahindra Bank told BloombergQuint. Aditi Nayar, principal economist at ICRA agrees but adds that it will exacerbate “concerns posed by other fiscal risks”.

While the revenue loss from the excise cut for the remainder of FY18 is not very large, it would exacerbate the concerns posed by other fiscal risks, such as the decline in the surplus transferred by the RBI and the possibility of shortfalls in inflows from disinvestment, other communication services etc. Moreover, state governments' revenue growth may be impacted, as many of them impose VAT on fuels on an ad valorem basis.

Aditi Nayar, Principal Economist, ICRA

Nayar rules out further excise cuts with crude oil prices already easing from the recent highs.

The government deregulated fuel prices in 2014, allowing them to move as per market conditions. Prices were revised every 15 days. In June this year, it decided to revise fuel prices daily in some metros to ensure that the retail price reflected the international price accurately.

While crude oil nearly halved in the last three years, auto-fuel prices are hovering around a three-year high. That's because the excise duty on petrol doubled to Rs 21.48 a litre during the period, and the levy quadrupled to Rs 17.3 per litre for diesel. That led to demands that the central government should either revise the daily mechanism or reduce its quota of taxes.

The price at which fuel is sold at the pumps includes the price of crude, customs duty, the excise duty, a value added tax levied by states, and a commission to dealers.

The government argued that 42 percent of what it gets from excise duty goes to the states and the rest towards funding welfare schemes and spending on railways, roads, infrastructure and sanitation.

Oil minister Dharmendra Pradhan told reporters at a press conference on September 13 that the recent spike in fuel prices is mainly due to the back-to-back hurricanes in the U.S., which led to an 18-20 percent spurt in prices as refineries cut output.