Don’t cut fuel taxes | Business Standard Editorials

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Roll-back will increase fiscal risks

The Union government is reportedly contemplating a possible cut in duties on petrol and diesel. While the desire to respond to political pressure regarding high fuel prices is understandable, given the headlines surrounding petrol prices hitting three figures in some parts of the country, the government must not give in. Any change in the petrol taxation regime should be focused on rationalising taxes and sharing revenues with the state, not on reducing the final price.

One important reason for standing firm is political. The government has consistently made the case that consumers should not complain about high petrol and diesel prices, because they are responses to the global price of crude oil and decisions made by oil-marketing companies. Of course, it is also true that taxes are a significant component of the eventual end price. But the fact is that this particular cut in taxes, if a cut is decided on eventually, will be in response to consumer demands, following a rise in prices at the pump. Once the government gets back in the game of manipulating the price at the pump to satisfy political considerations, it is a short step back to administered pricing — effectively reversing one of the most important reforms of recent years.

The fiscal context in which the government is facing this dilemma is also worth considering. The pandemic has greatly hit tax revenues. However, following an initial collapse in the price of crude oil globally, fuel prices have since held up well. The government recognised that the relatively inelastic nature of demand for fuel in India makes it an efficient commodity to tax. Further, since petrol and diesel are not part of the goods and services tax (GST) system, it is easy for the Union government to raise duties — and it has done so twice in the past year, in March and in May 2020. As a consequence, in the ongoing financial year, excise collection is due to rise by over 50 per cent over the previous financial year. But this has also increased the dependence of the Union government on indirect fuel taxes, which composed over 14 per cent of the Union’s gross revenues in 2019-20. Some of this is at the expense of consumers, but some of it is at the expense of state governments, where the share of indirect oil taxes in overall own-tax revenues has declined from over 20 per cent in 2014-15 to 16.5 per cent in 2019-20.

The Union will in any case face a reduction in its revenues when the time comes to introduce petrol and diesel into GST, as then some of this excise revenues it is currently monopolising will have to be shared with the states. Given this coming crunch in oil revenues, there is no reason for the government to consider lowering the overall tax rate on fuel. Further, perhaps most importantly, the strategic and long-term reasons for high carbon taxes remain potent. They will continue to provide the right incentives for India’s green transformation and broader electrification — and also work to insulate India’s external account and foreign policy choices from turbulence in the oil markets and oil-producing countries.