How a 100% tax on petrol is burning a hole in your pocket

The skyrocketing petrol and diesel prices are showing no signs of abatement. On Tuesday morning, the price of petrol hit a new high of Rs 84.70 per litre in the financial capital Mumbai and in Delhi it was retailing at Rs 76.87, up 30 paise from yesterday.

While one can't deny the impact that external factors have had on fuel prices in the country, the taxes levied by the Centre and state governments have also contributed significantly to the overall retail fuel prices. Currently, petrol is taxed at a little over 100 per cent and for diesel taxes come at around 66.48 per cent. These taxes include central excise duty and VAT.

Interestingly, while the retail prices have gone up, the price at which the fuel is sold to petrol pump dealers has come down drastically since 2013. The price of petrol charged to dealers during FY2014 was Rs 47.18 per litre, way more than the current charge of Rs 37.19 for the same litre. The government's effective tax rate on petrol in 2013 was at around 43 per cent and presently it is a little over 100 per cent.

Similarly, dealers in India had to pay Rs 52.68 per litre for diesel in FY2014, as against Rs 37.42 per litre in April 2018. Notwithstanding the fall the price charged to dealers, a litre of diesel in Mumbai costs Rs 72.21.

Despite a consistent drop in global crude oil prices ever since the Modi government came to power, the fuel prices in the country were maintained at the earlier levels by successive hikes in the excise duty. Tax levies on fuel have stabilised government's coffers at a time when GST collections were less-than-expected.

The central government levies Rs 19.48 a litre of excise duty on petrol and Rs 15.33 per litre on diesel. States have value added tax or VAT that vary from state to state. For instance, Maharashtra levies 46.52 per cent VAT on petrol, Kerala has 34 per cent and Goa imposes 17 per cent tax on petrol.

According to the finance ministry's revenue collection estimates, the central government expects to collect more than Rs 2.579 lakh crore by levying taxes on the petroleum products by the end of this fiscal. This is a massive jump from the gross revenue collection of around Rs 88,600 crore in 2013/14, in the last fiscal the collection was Rs 2.016 lakh Crore.

Centre has 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 last year.

According to Care Ratings, a 10 per cent increase in the fuel prices will lead to a direct increase of around 0.5 per cent in WPI and around 0.25 per cent in CPI.

Australian brokerage Macquarie on Monday said that the uptick in fuel prices may force Reserve Bank of India (RBI) to hike rates by 0.25 per cent in the August policy review.