As the economy is badly battered by the demand side shock caused by the coronavirus pandemic, increasing taxes on fuel, which has near-inelastic demand, appears to be the only alternative to governments to raise revenue.
The central government’s decision to levy an excise duty of Rs 10 on a litre of petrol and Rs 13 on diesel would help it in collecting additional revenue of Rs 1.6 lakh crore. While this would help the Centre in running its operations, it would not pinch consumers, as they would not pay extra due to already low prices in the global market. Crude oil price in the international market is $29.32 a barrel because of lower demand, supply glut and scarcity of storage facilities. As on Thursday, a consumer in Delhi pays 69.3 per cent tax when he buys petrol or diesel. In absolute terms, the Delhi consumer pays Rs 49.42 on petrol and Rs 48.09 on diesel. Of this, two-thirds of tax would go to the coffers of the government, while the rest goes to the state government.
Excise duty — a levy required to be shared with states — has traditionally been a cash cow for successive governments in New Delhi. However, a relatively low crude oil price in the last six years has allowed the Narendra Modi government to milk it to the maximum. But a few years back, the government had changed the nomenclature of fuel tax to road cess. Since the proceeds of the cess are not shared with states, the Centre appropriated the entire tax collection. The saving grace in the current price hike is that the additional levy is in the form of excise duty, which the Centre has to share with states. However, the Centre ought to speed up the transfer of shareable revenue to states, which have greater responsibilities towards people, with limited resources.