Government Hikes Taxes On Petrol And Diesel By Rs 10-13/Litre

The government has increased taxes on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively, in order to shore up revenue impacted due to a slowing economy and an over 40-day nationwide lockdown to curb the spread of Covid-19.

On May 5, the retail price in Delhi of petrol was Rs 71.26 per litre, and diesel Rs 69.39 per litre, according to data on leading fuel retailer Indian Oil Corporation Ltd.'s website.

The hike in taxes comes into effect from May 6., and is due to an increase in special additional excise duty as well as cess.

The special additional excise duty on petrol has been increased by Rs 2 to Rs 12 per litre, according to a government notification. The SAD on diesel has been hiked by Rs 5 per litre to Rs 9.

Besides this, road and infrastructure cess has been increased by Rs 8 to 18 per litre on both petrol and diesel, a separate notification said.

The jump in levies comes even as international crude oil prices have witnessed a dramatic decline in recent times. Last month, the May contract for West Texas Intermediate crude plunged below zero per barrel, and Indian refiners are taking advantage of cheap oil by storing oil in tankers out at sea.

The retail sale price of the fuels will not change despite the hike in taxes, a government official told BloombergQuint on the condition of anonymity. Though he shared no further detail, this suggests that oil marketing companies were likely to pass on the benefit of lower crude prices which has now been adjusted by imposing higher taxes, thereby leaving retail prices largely unchanged. To be sure, neither oil marketing companies nor the government have said this officially yet.

Since March 16, petrol price in Delhi has remained unchanged at Rs 69.59 a litre, and was revised upwards to Rs 71.26 on May 5. Similarly, price of diesel was unchanged at Rs 62.29 a litre since March 16, and was revised upwards to Rs 69.39 on May 5, according to data on Petroleum Planning and Analysis Cell.

The petrol and diesel price has been left unchanged at Rs 71.26 and Rs 69.39 a litre, respectively on May 6, according to daily price revision updated on IOCL website.

A back of the envelope calculation suggests every Re 1 hike in excise duty on petrol and diesel boosts the central government's tax revenue by about Rs 14,000 crore. Also, tax collection via cess does not have to be shared with states.

However, the graded lifting of the lockdown, and its impact on consumption, is unlikely to add meaningfully to revenue collection.

Domestic consumption of petroleum products is at all time low due to stagnation in the economy, and any increase in tax rates would not yield any significant benefit in the short-run, said Rajat Mohan, a partner at tax advisory firm AMRG & Associates.

The government is under immense pressure to give a big fiscal support to the trade and industry with virtually zero resources at its disposal, Mohan said. Therefore, it has now banked on the old system of collecting higher taxes on petroleum products to increase its revenues, he added.

In March, via amendments to the Finance Bill in March, the government had raised the cap on special additional excise duty on petrol and diesel to Rs 18 and Rs 12 per litre, respectively. The threshold for imposing road and infrastructure cess on petrol and diesel was increased to Rs 18 per litre from Rs 10 earlier.