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Tax hike on petrol, diesel to add Rs 1.4 lakh crore to govt's kitty: Barclays

Aprajita Sharma     May 6, 2020

In the wake of a record hike in excise duty on petrol and diesel late on Tuesday, the global brokerage Barclays expects the Central government to incur Rs 1.4 lakh crore revenue benefit, that is, 0.67 per cent of the GDP. "This is on top of an estimated Rs 2.8 lakh crore already being collected by the Central government from the fuel tax/cess, which would bring the total contribution to central exchequer from fuel taxes to Rs 4.4 lakh crore or nearly 2.1 per cent of GDP," Barclays says in a report.

These projections assume that demand for both petrol and diesel will fall 12 per cent in financial year 2020-21, the report adds. Notably, the government hiked the excise duty by a record Rs 10 per litre on petrol and by Rs 13 per litre on diesel. This includes special additional excise duty hike of Rs 2 and Rs 5 per litre on petrol and diesel, respectively and road cess of Rs 8 per litre on both.

While revenues coming out of road cess will only go to the Centre, it will share some revenues out of excise duty hike with state governments.  Meanwhile, several states and union territories, including Delhi, Haryana, Assam, Punjab, have also raised the state tax on fuel.

Barclays says since the Centre is effectively appropriating the gains made by oil marketing companies for its own balance sheet, the effect on inflation from this hike is likely to be limited. However, the fuel tax increases at state level are likely prove to be inflationary to some extent. "For the Consumer Price Index (CPI)-based inflation, we estimate a Rs 2 per litre rise in petrol prices leads to a 10-15 bps direct increase in headline inflation, which is negligible. However, combined with increased taxes on alcoholic beverages, the fuel tax hikes are likely have some inflationary implications," says Barclays.

"Alcoholic beverages have a total weight of around 0.95 per cent in the CPI basket, and we estimate that even a 20 per cent overall price hike on alcoholic beverages leads to inflation around 18 bps for headline inflation," it adds.  CPI inflation had eased to 5.91 per cent in March. The figures for April will be released next week.

Also read: 69%! India now has highest taxes on petrol and diesel in the world

Also read: Petrol, diesel prices: Decoding the tax structure

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