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Choice for government: Fuel tax cut or inflation? – Hindustan Times

Revenue receipts from Union excise duties have proved to be the silver lining in the 2021-22 Budget, as far as central taxes are concerned. Not only does the government hope to collect, as per Revised Estimates (RE), more than what its Budget Estimates (BE) projected in 2020-21, the 2021-22 (BE) numbers project union excise duties to be the only tax head where 2021-22 (BE) numbers are greater than 2020-21 (BE) numbers. To be sure, 2021-22 (BE) collections are expected to be lower than 2020-21 (RE) collections on this head. Oil minister Dharmendra Pradhan on Wednesday ruled out any cut in excise duty. His remark came on a day the price of petrol rose to an all-time high of .87.60 a litre in Delhi. The diesel rate rose to .77.73 per litre in the city.

1. Rising fuel tax rates contributing to higher excise duty collection

After most indirect taxes were subsumed into the Goods and Services Tax (GST) post 2017, the bulk of union excise duties are receipts from taxes on petroleum products, primarily petrol and diesel. In 2021-22, the reason for a sharp jump in union excise duty collections is not a spike in consumption of petrol-diesel but an increase in tax rates. As oil prices fell, the government chose to keep retail prices of fuel roughly constant, and enhanced excise duties – a move that shored up revenue receipts.

However, the use of these duties on petrol and diesel to boost revenue receipts might come at the cost of higher inflation in the economy as oil prices strengthen, provided the government does not cut excise levies. But doing so may hit revenue receipts. Here are four charts which explain this trade-off.

2. Tax component of petrol-diesel prices has been increasing in the post-Covid-19 period

The petroleum ministry provides disaggregated data on the various components of the price of petrol and diesel in the country. This shows that the tax component of both petrol and diesel prices increased significantly in the post-Covid-19 period. Government taxes accounted for.37.8 and .28 per litre in petrol and diesel prices on April 1, 2020 (a few days after India declared a lockdown to slow the pandemic). This has increased to .52.9 and .43.1 by February 1, 2021.

The 2021-22 Budget has not reduced duties on petrol and diesel. What it has done instead is shift the special excise duty to the newly created head of agriculture, infrastructure and development cess; .2.5 per litre on petrol and .4 per litre on diesel will now go to this. There is no change in retail prices.


3. International oil prices have been rising gradually, adding to the petroleum price rally

International crude prices fell sharply after the pandemic, as economic activity and fuel consumption plummeted with lockdowns and travel restrictions across the globe. Oil prices have started regaining momentum with vaccine roll-outs across the world. Price of India’s crude oil basket has increased by 26% to $54.79 per barrel between November 2020, when most Covid-19 vaccines were approved, and January 2021. It is this rise in international crude prices which has been driving petrol-diesel prices in the past few months.

Although, oil prices are still significantly lower than what they were before the pandemic erupted, they are expected to increase compared to what they were in 2020. If international crude prices continue their upward trajectory, base price of petrol and diesel will keep increasing, which will entail another source of tailwinds in addition to higher taxes.


Higher fuel prices, along with growing economic momentum, could add to inflationary pressures

As international crude prices increase, petrol-diesel prices will continue to increase if tax rates do not change. If Covid-19 infections in the advanced countries drop sharply with vaccinations, oil demand and therefore prices could increase from their current levels. In January, Goldman Sachs estimated Brent crude oil price to reach $65 by middle of 2021 as demand boosts from the roll-out of Covid-19 vaccines and there is limited increase in supply from OPEC+ countries. This will entail an upward pressure on overall inflation numbers. Because fuel prices affect household budgets both directly (travel expenses) and indirectly (transport costs), they can have a significant cascading effect on prices. Experts have been pointing out that businesses might have been reluctant to pass on such costs to consumers when the economy was not doing well.

However, this could change with the economy picking up momentum. The latest monetary policy resolution of the Reserve Bank of India highlighted these concerns.

Given the centrality of petroleum products in the government’s fiscal calculations -the Budget assumes a very high excise duty collection and lowest petroleum subsidies ever – a sharp rise in global oil prices could force the economy into an unenviable trade-off between fiscal balance and inflation.