By Raunak Bhiwal
There is always a lot of buzz about the budget. As with every year, this year too the finance minister’s words were dissected and analysed ad nauseum. The news channels mostly cover the news items which impact ‘Aam Aadmi’ or the large corporate houses. However, there are many decisions whose impact cannot be easily perceived.
Finance Minister Aruj Jaitley reduced the Basic Excise duty on Petrol and Diesel by INR 2/litre. He replaced the old Additional Excise Duty of INR 6/litre with INR 8/litre of the Road and Infrastructure cess. Combined, the two decisions result in no impact on the prices of oil and diesel. However, these changes did have deep implications for the state governments.
Some context
The central government projected that the budget measures would take in more than INR 10 trillion from levies on petrol and diesel between 2014-15 and 2018-19. The Centres gross revenue collections from petroleum products have risen steadily from INR 1.05 trillion in 2014-15 to a projected INR 2.57 trillion in 2018-19. Prior to this, in 2013-14, the gross revenue collection from petroleum, oil and lubricant products (POL) was INR 886 billion.
Revenue from excise duty on POL products is a significant source of funds which helps the government keep the fiscal deficit in check and enhance productive expenditure. Duties on fuel have been a big source of revenue for both the Centre and States and help to fund expenditure, said an official. This revenue source is also important to the states, which levy VAT on petrol and diesel.
Explaining the mechanism
According to the currently defined revenue-sharing structure between the central and the state governments, 42% of the Basic Excise Duty (BED) collected is shared with the state governments. The cess or additional excise duty remains with the central government.
Calculations show that the budget’s rejigging of the revenue structure will reduce the BED by about INR 280 billion. This will bring down the revenue to be shared with state governments by about INR 120 billion. Even with these changes, the state governments are expected to receive about INR 7.9 trillion from fiscal devolutions in 2018-19, as against the revised estimate of about INR 6.7 trillion in 2017-18. On the part of central government there is an expectation to collect about INR 2.4 trillion from various duties on petrol, diesel, and other fuels. Of that, INR 1.3 will be generated from the road and infrastructure cess.
Impact of the revenue changes
Such a move will improve the central government’s fiscal buoyancy, which means that as the GDP grows, the government’s tax-revenue will also increase without any change in the tax rate. Higher buoyancy means less of a need to borrow money. It will provide more funding for roads and infrastructure. On the other hand, states are free to levy ad valorem duties on fuel. The increased revenue will help the government in its mission to cut the fiscal deficit.
Maharashtra has the highest VAT on petrol, 43%, while MP and Punjab are joint seconds with 36%. It is to be noted that Punjab and Maharashtra derive 60% of their revenues from their own sources, but in MPs case the figure is 36%. Thus it is important for MP to levy VAT given the reduction in the excise duty. Hence the state may see a rise in Petrol and Diesel prices. Additionally, in states like Bihar which receive 50% of its revenue as central government grants, the changes will have limited impact on local oil prices.
What lies ahead
In 2015, the government steadily increased the duties levied on oil, which took away from consumers the gains they would otherwise have made when oil prices plummeted. More recently, the petroleum ministry has sought help from the finance ministry to reduce the duties in order to compensate for rising oil prices. The government did slash tax rates in 2017. However, the price of oil has continued to rise, negating the benefits which accrued from this. If the oil prices continue to rise the central government may again have to reduce the rates which would put pressure on the government’s plans to meet its low deficit targets.
The current structure of levying multiple duties on oil is complicated. The central government has time and again pointed out that it wants to bring petroleum products under the unified GST. Such action will simplify the currently complicated tax structure, which would then improve how the central government shares taxe revenues with the states.
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