Deriving comfort from robust revenue flows, the Centre on Wednesday announced the much-awaited cut in excise duty on petrol and diesel by Rs 5 and Rs 10, respectively, to lessen the burden of rising international crude oil prices on consumers and aid economic demand. However, this move is expected to cost the exchequer around Rs 60,000 crore, but may not impact the fiscal deficit target of 6.8 per cent of the GDP with overall revenue collections double than that of last year in the first half of FY22.
"To give a further fillip to the economy, the Government of India has decided to significantly reduce the excise duty on diesel and petrol," the finance ministry said in a statement on Wednesday. The reduction in excise duty on petrol and diesel will also boost consumption and keep inflation low, thus, helping the poor and middle classes. Today's decision is expected to further spur the overall economic cycle, it added.
The excise duty mop up in the first half is up 33 per cent year-on-year at Rs 1.71 lakh crore and is already half way through the budget estimate of Rs 3.35 lakh crore. Incidentally, the excise duty budget estimate for FY22 was already very conservative. It was nearly Rs 54,000 crore lower than the actual mop up in 2020-21, suggesting that the government was anticipating a cut in fuel taxes this year.
"Centre's revenue position remains robust with improved compliance and enforcement action. We hope that the cut in excise duty will translate into higher economic activity and boost consumption and demand," said a government official on condition of anonymity to Business Today.
The excise duty on petrol now stands at Rs 27.98 per litre and that on diesel at Rs 22.83 per litre.
A Re 1 cut in excise duty on petrol costs the exchequer Rs 4000-5000 crore, while the same for diesel costs Rs 14000-15000 crore.
Aditi Nayar, chief economist, ICRA is of the opinion that the much-awaited exercise will boost sentiment during the festive season, aiding consumption. "Moreover, this will ease the inflation pressures arising out of the impact of global supply pressures, helping to avert early policy normalisation," she said.
Nayar added that the improved mobility will partly offset the impact of the excise duty cut on the government's tax collections. "Based on the available data on tax collections in H1 FY22, we had expected the gross tax collection to exceed the FY22 BE by Rs 2 lakh crore, which will mitigate the impact of the excise cut," she said.
Brent crude oil prices have been rising steadily from around $65 a barrel in August-end to near $85 a barrel now.
"In recent months, crude oil prices have witnessed a global upsurge. Consequently, domestic prices of petrol and diesel had increased in recent weeks exerting inflationary pressure. The world has also seen shortages and increased prices of all forms of energy. The Government of India has made efforts to ensure that there is no energy shortage in the country and that commodities such as petrol and diesel are available adequately to meet our requirements," the government said in the statement.
Incidentally, the Centre had last year introduced the steepest hike in taxes on petrol and diesel, hiking the road and infrastructure cess by Rs 8 each for petrol and diesel and special additional excise duty (SAED) by Rs 2 per litre and Rs 5 per litre, respectively. The entire hike went to the Centre's coffers and was not devolved to the states.
Since the duty is levied in absolute terms per liter, the international crude price movement has no bearing on the collection.
The government urged state governments to also cut value added tax on petrol and diesel. "States are also urged to commensurately reduce VAT on petrol and diesel to give relief to consumers," the statement from the finance ministry read.
Tamil Nadu government had in August decided to reduce the petrol price in the state by Rs 3 per litre.
Mahesh Jaising, Partner, Deloitte India points out that the announcement of reduction of excise duty will not only reduce the fuel prices directly for the consumers but also assist in reduction of costs through the supply chain, for example -- inputs, logistics cost, etc, as the excise duty is a non-creditable cost for businesses too (being outside of GST).
"Additionally, the actual amount state VAT typically being a per cent of fuel price should also see a reduction (given the exclusion of excise from base price). It would need to be watched whether states will follow suit as well and reduce rates of state taxes, which the Centre has requested for," he added.
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