Government steps to tackle inflation: Excise duty on auto fuel sharply reduced

The government on Saturday announced a series of measures to curb fugitive inflation, which threatens growth and burdens consumers as well as the rupee. It has reduced excise duty on petrol by Rs 8 per liter to Rs 19.1 per liter and diesel by Rs 6 per liter to Rs 15.8 to give relief to consumers, a move that would cost the exchequer Rs 1 trillion annually.

In addition, more than 90 million beneficiaries of the Prime Minister’s Ujjwala Yojana will be given a subsidy of Rs 200 per LPG cylinder up to 12 refills a year; The measured revenue impact is about Rs 6,100 crore per annum. Reducing the various types of excise duties on auto fuel would directly lead to a reduction in state VAT as it includes central taxes. Finance Minister Nirmala Sitharaman called on the state governments, especially those that have not reduced VAT rates since the last round of excise duty in November 2021, to “apply the same cuts and provide relief to the common man”.

The minister said the reduction in excise duty would reduce the price of petrol by Rs 9.5 per liter and diesel by Rs 7 per liter (including state VAT relief). Before the reduction in excise duty (which came into effect immediately), the retail price of petrol in Delhi on Saturday was Rs 105.41 per liter, central excise Rs 27.9 per liter and state VAT Rs 17.13 per liter.

After the announcement of FM, Prime Minister Narendra Modi tweeted: “We always have people first! Today’s decisions, especially those related to the significant reduction in petrol and diesel prices, will have a positive impact in a number of areas, bringing relief to our citizens and further ‘making life easier’. “

These monetary measures will complement the fiscal austerity measures announced by the RBI at its April meeting and on May 5 with a staggering rate hike. Retail inflation outperformed analysts’ expectations and broad-based growth reached a 95-month high of 7.79% in April. Pressure on food, energy and key stocks reinforces the possibility of an aggressive rate hike by the central bank in June to break the back of inflation. Wholesale price inflation rose to 15.08% in April, the highest since September 1991.

In a series of tweets, Sitharaman said the government was “committed to ensuring that the prices of essential commodities are kept under control”.

“The world is going through a difficult time today. Even as the world recovers from the Kovid-19 epidemic, Ukraine’s conflict has led to supply chain problems and shortages of various products. This has led to inflation and recession in many countries, ”he said.

Ujjwala could help revive the subsidy project on LPG cylinders under the scheme, which was quickly unveiled due to skyrocketing prices of cooking gas after the government stopped subsidizing in May last year.

Taking hints from the Center, which reduced petrol and diesel by Rs 5 and Rs 10 per liter, respectively, effective November 5, 2021, 22 states and Union Territories reduced their sales tax / VAT rates on two fuels. Although the state taxes were levied on ad-valorem against the specific pressure of the Center, the tax cuts in the State / UT were up to Rs 8.7 per liter for petrol and Rs 9.52 per liter for diesel.

Retail fuel prices came under pressure due to rising crude oil prices and prices crossed Rs 100 per liter, Prime Minister Narendra Modi on April 27 criticized the opposition ruled Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu and Kerala. Jharkhand does not reduce taxes on petrol and appeals for reduction of tariffs for the convenience of consumers. These states, however, did not cut taxes and argued that since the Center increased taxes in the first place, it had a responsibility to reduce the pressure on it.

Where the central tax revenue from the two fuels has risen from Rs 2.25 trillion in FY18 to Rs 3.35 trillion in FY22, an increase of about 50% and remains at around Rs 3.35 trillion in FY22 despite tariff cuts in November. State revenue from energy increased by 35% to Rs 2.52 trillion in FY22 from Rs 1.86 trillion in FY18.

Aditi Nair, chief economist, ICRA, said: “The welcome reduction in excise duty will help cool the pace of inflation and complement monetary policy. We project CPI inflation in May 2022 between 6.5-7.0%. Revenue expenditure, while component, may be exploited more than budgeted revenue through other taxes. We now estimate (central) tax revenue to exceed the budget estimate by at least 1. 1.3 trillion, even after the reduction in excise duty. “

Indian crude rose from about $ 83 a barrel in early November to 128 128 / barrel on March 9, but fell to 7 107 / barrel on May 20.

The weights of the “Crude Petroleum and Natural Gas” and “Fuel and Energy” subgroups (which include petrol and diesel) in WPI are 13.15% and 2.41% in CPI. Changes in global crude oil prices have a direct and indirect effect on various components of WPI and CPI.

Central tax revenues from energy increased 49% between FY18 and FY22 (RE), while states’ tax revenues from these items increased by about 31% during the period.

It is estimated that every 10% increase in the Indian basket of crude oil will push up consumer inflation to 0.4 percentage points and drag GDP growth to 0.2 percentage points.

Prior to the latest excise duty cut, the Center was seen spending a total of Rs 1.8 trillion more on FY23 than the budget estimate on fertilizer and food subsidies. Additional Secretary Outgo could be offset by a steep jump in net tax receipts and higher investment revenue, Finance Secretary TV Somanathan told FE.

Somanathan said it was too early to make any definite estimate of additional tax collection in the current financial year, with analysts and government sources suggesting that the Centre’s tax collection could be Rs 1.7 trillion more than the net transfer to the state. BE 19.35 trillion rupees.

In 2019, the total excise duty on petrol will be Rs 19.98 per liter and Rs 15.83 per liter on diesel. The Center has doubled excise duty on petrol by Rs 32.98 per liter and diesel by Rs 31.83 per liter in 2020. In the FY22 budget, the tariff was reduced to Rs 32.90 per liter for petrol and Rs 31.80 per liter for diesel. And after retail prices rose to record highs across the country in November last year, it was reduced to Rs 5 per liter on petrol and Rs 10 per liter on diesel.

The share of auto taxes has shrunk in recent years. For example, while 41% of the central tax on diesel was shared with the States under the relevant formula in FY15, only 5.7% is currently being shared with the States.

In recent weeks, a slight drop in crude prices has allowed oil marketing companies to hold prices.

The latest increase in petrol and diesel prices was 80 paise / liter on April 6. Between March 22 and April 6, there was an increase of 14, adding up to Rs 10 / liter for both petrol and diesel.

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