The central and state government depend heavily on taxes on fuel for revenues. Crude oil prices have fallen from USD 115 per barrel to USD 68 per barrel which is around to be 40% fall but petrol prices have only effectively fallen by 11% in the same time period. To keep in tandem with the falling prices the excise duty has to be hiked in order to maintain the revenues at par for the Government. The move is therefore expected to raise the revenues of the Government. The current account and fiscal deficit are two crucial macroeconomic factors that affect the value of the Indian Rupee. The current account has reduced from 4.7% of GDP seen in fiscal 2012-13 to 1.7% of GDP in fiscal 2013-14 and is expected to stay stable on account of lower crude oil prices. However with falling tax revenues, the government will find it difficult to meet its fiscal deficit target of 4.1% of GDP for this fiscal.
Tax Structure of Petrol and Diesel
Petrol’s Pricing Structure
Customs Duty – 4%
Excise Duty -25%
VAT and State specific taxes -17%
Diesel’s Pricing Structure
Customs Duty – 7%
Excise Duty -13%
VAT and State specific taxes -12%
Consumers in Pune are paying Rs.71 per litre for petrol (highest in the country) as compared with Rs.50 per litre (lowest in the country) in Goa-Panjim it is due to multiple layers of taxes like value added tax (VAT), state-specific charges (SSC), local body tax (LBT), entry tax and cess.
The Government has raised the excise duty on Petrol and Diesel by Rs.2.25 per litre and Rs.1 per litre respectively. It had last raised excise duty on Petrol and Diesel by Rs.1.5 per litre each on 14th November 2014. The decision comes after the announcement of the cut in the Petrol and Diesel prices by 91 paisa and 84 paisa respectively in the last week of November 2014.
Why is the Government not passing on the fall in crude oil prices to customers? Why is the Government raising excise duty on Petrol and Diesel? The answers to the above questions are hidden in the fiscal condition of the Government. Fiscal deficit is expected to be 4.1% at the end of the current financial year and as such continues to be a worry for the new Government that is elected at the centre. Fiscal deficit comes on account of the difference in the Revenue and Expenditure of the Government. The Finance minister recently announced that there would be increase in the exemption limit for tax payers. The Government is essentially giving more money in the hands of the salaried individual as lower taxes tend to increase the disposable income. This is in fact an incentive given to spend more money so that consumption in the form of increased demand shows significant improvement in the economy. This drives higher growth in the Gross Domestic Product of the economy and gets India closer to the observed growth rate of 9% that was seen in the golden period of 2006-2007.
The disparity in the revenue and expenditure of the Government has to be met by sources other than taxing the individual. Revenue – earned from taxation of incomes, commodities and services – is the prime consideration for a finance minister in order to keep the budget deficit in check.
Net direct tax collections in April-September increased 7.09% against a Budget target of 19% for 2014-15, as income tax refunds shot up 54.51% during the period. Tax collections, net of refunds, stood at Rs.2, 688.36 bn in the first six months of the current financial year (FY 2014-15), compared to Rs.2, 510.28 bn during the same period in 2013-14 according to the Central Board of Direct Taxes (CBDT). Indirect tax revenue collections have increased from Rs.2, 699.09 bn in April-Oct 2013-14 to Rs.2, 851.26 bn during April-Oct 2014-15 registering an increase of 5.6% against full year growth target of 19%. Excise duty has shown negative growth of 1.2% in the April-October 2014 period.
The main source of government revenue comes from taxation of incomes, particularly from profits of the corporate sector. Presently, this sector generates more than a third of the central government’s gross tax revenue even though it is not in the prime of health. Production in the manufacturing sector is nearly static and profits come mainly from inflation. Had industry been growing faster, the government would have already reached its target of zero revenue deficit.
The raise in the excise duty of petrol and diesel is expected to increase the revenue of the Government in the remaining current financial year by Rs.100 billion.
Oil marketing companies share prices have rallied significantly by over 150% over the last one year as gross recoveries made it possible for them to show profits on their balance sheet after a very long time. Bharat Petroleum Corporation Ltd., Indian Oil Corporation Ltd. and Hindustan Petroleum Corporation Ltd have given a return of 110%, 79% and 186% respectively in the last one year. We have a weightage of 20% for Oil and Gas in our Nineteen Stock Portfolio and 29% in our Twelve Stock Portfolio. The rise in the excise duty would be absorbed by the companies itself and it will not be passed on to the customers. These companies would then try to maintain their margins by not reducing the prices of petrol and diesel even if crude oil prices in the International market fall below USD 60 per barrel. Effectively the sharp fall in the fuel inflation would be marginally compensated by the rise in the excise duty of petrol and diesel. Falling fuel inflation would thus have marginal benefits for consumers and increased revenue for the Government.