States vs Center on fuel taxes

• The Center and the states are at loggerheads over taxes and duties on petrol and diesel.
• Center feels the states are not reducing VAT in line with the Center’s cut in excise duty, the states have expressed concerns over their fiscal cushion. (GST compensation regime due to end in June)

How fuel is taxed

States apply an ad valorem VAT or sales tax on the base price, freight charges, excise duty and dealer commission on petrol and diesel.

• State collections also rise as the Center hikes excise duties.
• Prior to the cut in excise duties on November 4, the Centre had increased excise duties by a total of Rs 13 per liter on petrol and Rs 16 per liter on diesel.
• Delhi imposes 19.4% VAT on petrol while Karnataka levies a 25.9% sales tax on petrol and 14.34% on diesel.
• Certain other states impose an ad valorem tax in addition to a flat tax per liter.
• Andhra Pradesh levies Rs 4 per liter VAT and Rs 1 per liter road development cess on autofuels in addition to VAT (31% on petrol; 22.5% on diesel).
• Agriculture Infrastructure and Development Cess (AIDC): Rs 2.5 per liter on petrol and Rs 4 on diesel.

Fuel levies as Revenue Share

Excise duty and VAT on fuel constitute an important source of revenue for both the Center and the states.

• Excise duty on fuel makes up about 18.4% of the Center’s gross tax revenues.
• Petroleum and alcohol, on an average, account for 25-35% of states’ own tax revenue, as per the RBI’s Study of Budgets 2020-21.
• Of the revenue receipts of states, central tax transfers comprise 25-29%, and own tax revenues 45-50%.

As per the Petroleum, Planning & Analysis Cell (PPAC)

• During April-December 2021, taxes on crude oil and petroleum products had yielded Rs 3.10 lakh crore to the central exchequer.
• It includes Rs 2.63 lakh crore as excise duty, and Rs 11,661 crore as cess on crude.
• For the same period, Rs 2.07 lakh crore accrued to the states’ exchequer, of which Rs 1.89 lakh crore was through VAT.
• Petroleum taxes with states are shared out of basic excise duty.
• The Center also levies additional excise duty and cesses on petroleum products.
• The levies on fuel and liquor have also become an important source of revenue for states as other indirect tax revenue is routed through the GST regime.

Tax revenues & price trends

The Center’s excise duty collections moved upward during 2014-15 to 2016-17. Government again hiked since 2019-20 after excise duty was raised in 2019.

• Every rupee hike in excise duty roughly yields Rs 13,000-14,000 crore annually, conditional on global prices and consumption levels.
• Oil marketing companies (OMCs) have been revising prices since last month in line with rising crude prices, after a freeze of 137 days.
• Ordinarily, the prices of petrol and diesel are revised daily in line with a 15-day rolling average of benchmark prices.
• The price of Brent crude has increased by about $25.53 per barrel since November 4 to $106.48 per barrel.
• India imports about 85% of its crude oil requirements.

Exam Track

Prelims Takeaway

• Fuel levies as Revenue Share
• Petroleum, Planning & Analysis Cell (PPAC)
• Tax revenues from fuel
• Taxation of Petroleum products