Govt cuts excise duty on petrol, diesel but introduces road cess of Rs 8

In a rejig of excise duty on petroleum products, the union government on the Budget Day cut basic excise duty on petrol and diesel by Rs 2. The Modi government also abolished additional excise duty on fuel by Rs 6. While the government has cut excise duty, petrol prices are likely to remain the same as a new road cess of Rs 8 per litre has been introduced.  

This come at a time when the petrol price has crossed Rs 80 per litre in Mumbai. Petroleum Ministry had earlier moved a proposal to reduce excise duty on the two fuels as part of the pre-Budget memorandum submitted to the Finance Ministry.

With crude oil price inching towards $70 a barrel, Oil Ministry had earlier sought the intervention of the finance ministry to cut down the excise duty on petrol and diesel in the budget. The cut in excise duty would have offset the hike in global crude prices ahead of 2019 Lok Sabha elections.

Another excise duty cut would have put an additional burden on the fiscal deficit target as the government is already grappling with lower indirect tax revenues after the GST implementation. Centre had steadily increased excise duty on petrol and diesel when the global crude prices had plummeted below $30 a barrel. The government had in November 2015 and January 2016 raised excise duty on petrol and diesel five times to take away gains arising from plummeting international oil prices.

Prior to that, the government had in four installments hiked the excise duty on petrol and diesel between November 2014 and January 2015 to buffer the gains from fall in global crude prices.

Excise duty on petrol was hiked by Rs 11.77 per litre and that on diesel by 13.47 a litre ever since Prime Minister Narendra Modi-led BJP government came to power in 2014. After moving to daily revision of fuel prices in June last year, the government had cut basic excise duty on petrol and diesel by Rs 2 per litre in October.

The government has excluded petrol and diesel from the ambit of GST (Goods and Service Tax). Petroleum products still attract state and central levies such as excise duty and VAT (Value added tax).

The latest uptick in crude price follows comments from Saudi Arabia that major oil producers were in agreement that they should continue cooperating on production after their deal on supply cuts expires at the end of 2018. To remind you, a group of oil producers including OPEC and Russia, the world's biggest crude producer, started to withhold production in January last year to prop up prices. Declining drilling activity for new oil production in the United States has further supported crude prices.

Once brought under GST, prices of petrol and diesel are likely to stabilise and may remain within the Rs 50-mark since it will do away with the excise duty imposed by the Centre and the Value Added Tax (VAT) levied by the states. Under the new tax regime, the maximum tax imposed on petrol and diesel will be capped at 28 per cent. The government, however, may choose to levy an additional cess on diesel and petrol.

Finance Minister Arun Jaitley had recently said that the Central government favours bringing petrol products under the GST umbrella, but is looking for consensus with state governments to do the same. Incidentally, the BJP-led government has cut excise duty only once during its tenure but raised it nine times between November 2014 and January 2016.