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No way the governments-Centre or States-can cut taxes on petrol and diesel!

Over Rs 10 lakh crore from fuel taxes have been deployed in social schemes.  Cutting taxes mean cutting down on such schemes which will be political hot potato in the run-up to general elections.

twitter-logoRajeev Dubey | September 3, 2018 | Updated 21:48 IST
No way the governments-Centre or States-can cut taxes on petrol and diesel!

If at all public pressure forces the Centre and/or the states to cut taxes on petrol and diesel it be will more optics and theatrics than anything else. Because neither the Centre nor the states are in any position to make any substantial cuts in taxes. Between 2014-15, Centre collected Rs 10.04 lakh crore in taxes from petroleum products and deployed in social security schemes. States have done the same.

Total tax collections from petroleum sector to Centre and States have gone up from Rs 3.32 lakh crore in 2014-15 to Rs 5.53 lakh crore in 2017-18. Who would want to give up the Goose that lays such golden eggs?

Even if they wish to, they can't. Each Rupee cut in taxes results in Rs 13,000 crore deficit. Centre, for instance, is already running up a very substantial deficit in GST collections of approx Rs 10,000 crore per month so far this fiscal. Centre's GST collection target is Rs 1.04 lakh crore per month. While the collections since April have been:

  • April                       1,03,458
  • May                        94,016  
  • June                       95,610
  • July                        96,483
  • August                    93960

In all, the government has collected only Rs 4.8 lakh crore-a good Rs 36,473 crore short of the target of Rs 5.20 lakh crore between April-August this fiscal.

This leaves the government will absolutely no leeway to cut taxes. If it does, this deficit will widen further by Rs 13,000 crore for every Rupee cut in taxes.

Its hands are tied further as it is already committed to meet any shortfall in states's GST deficits for a period of 5 years since the July 2017 launch of GST. If it cuts excise on petrol or diesel, far from compensating the states, its own deficit will be beyond control.

Remember, between November, 2014 and July, 2017 when international crude prices were benign the Centre chose not to pass on any benefits of international crude prices to the consumer. Instead, it raised excise from Rs 3.46 per litre on diesel to Rs 15.33 and from Rs 9.20 per litre in petrol to Rs 21.48.

The resources raised from these were deployed in social schemes such as Ujjwala, new infrastructure development in roads and power. In all, the Centre would raise Rs 10.14 lakh crore between 2014-15 and 2017-18. Cutting taxes mean cutting down on such social schemes which can be quite a political hot potato in the run-up to general elections.

Chances of tax cuts in future look grim too. Unless other sources of taxes improve drastically, tax cuts on fuel are not likely next year either. Centre has committed to states a 14 pc growth rate year on year in GST revenues in these 5 years. With current GST collections already Rs 10,000 crore a month short of its target, how the deficit will be bridged is itself a big question mark.

It's really a catch-22 situation for the Centre. It can only hope the international prices show some respite. Else, tax cuts-if any-will be theatrics. Not anything substantial.

Also read:  Petrol prices at an all time high in India! How expensive is it in China, US, UK?

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