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In the past few months, retail prices of petrol and diesel have consistently increased and have reached all-time high levels. On September 24, 2018, the retail price of petrol in Delhi was Rs 82.72/litre, and that of diesel was Rs 74.02/litre. In Mumbai, these prices were even higher at Rs 90.08/litre and Rs 78.58/litre, respectively.
The difference in retail prices in the two cities is because of the different tax rates levied by the respective state governments on the same products. This blog post explains the major tax components in the price structure of petrol and diesel and how tax rates vary across states. It also analyses the shift in the taxation of these products, its effect on retail prices, and the consequent revenue generated by the central and state governments.
What are the components of the price structure of petrol and diesel?
Retail prices of petrol and diesel in India are revised by oil companies on a daily basis, according to changes in the price of global crude oil. However, the price paid by oil companies makes up 51% of the retail price in case of petrol, and 61% in the case of diesel (Table 1). The break-up of retail prices of petrol and diesel in Delhi, as on September 24, 2018, shows that over 45% of the retail price of petrol comprises central and states taxes. In the case of diesel, this is close to 36%.
At present, the central government has the power to tax the production of petroleum products, while states have the power to tax their sale. The central government levies an excise duty of Rs 19.5/litre on petrol and Rs 15.3/litre on diesel. These make up 24% and 21% of the retail prices of petrol and diesel, respectively.
While excise duty rates are uniform across the country, states levy sales tax/value added tax (VAT), the rates of which differ across states. The figure below shows the different tax rates levied by states on petrol and diesel, which results in their varying retail prices across the country. For instance, the tax rates levied by states on petrol ranges from 17% in Goa to 39% in Maharashtra.
Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product. This implies that while the excise duty component of the price structure is fixed, the sales tax component is charged as a proportion of the price paid by oil companies, which in turn depends on the global crude oil price. With the recent increase in the global prices, and subsequently the retail prices, some states such as Rajasthan, Andhra Pradesh, West Bengal, and Karnataka have announced tax rate cuts.
How have retail prices in India changed vis-à-vis the global crude oil price?
India’s dependence on imports for consumption of petroleum products has increased over the years. For instance, in 1998-99, net imports were 69% of the total consumption, which increased to 93% in 2017-18. Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products. The following figures show the trend in price of global crude oil and retail price of petrol and diesel in India, over the last six years.
The global price of crude oil (Indian basket) decreased from USD 112/barrel in September 2012 to USD 28/barrel in January 2016. Though the global price dropped by 75% during this period, retail prices of petrol and diesel in India decreased only by 13% and 5%, respectively. This disparity in decrease of global and Indian retail prices was because of increase in taxes levied on petrol and diesel, which nullified the benefit of the sharp decline in the global price. Between October 2014and June 2016, the excise duty on petrol increased from Rs 11.02/litre to Rs 21.48/litre. In the same period, the excise duty on diesel increased from Rs 5.11/litre to Rs 17.33/litre.
Over the years, the central government has used taxes to prevent sharp fluctuations in the retail price of diesel and petrol. For instance, in the past, when global crude oil price has increased, duties have been cut. Since January 2016, the global crude oil price has increased by 158% from USD 28/barrel to USD 73/barrel in August 2018. However, during this period, excise duty has been reduced only once by Rs 2/litre in October 2017. While the central government has not signalled any excise duty cut so far, it remains to be seen if any rate cut will happen in case the global crude oil price rises further. With US economic sanctions on Iran coming into effect on November 4, 2018, India may face a shortfall in supply since Iran is India’s third largest oil supplier. Moreover, Organization of Petroleum Exporting Countries (OPEC) and Russia have not indicated any increase in supply from their side yet to offset the possible effect of sanctions. As a result, in a scenario with no tax rate cut, this could increase the retail prices of petrol and diesel even further.
How has the revenue generated from taxing petroleum products changed over the years?
As a result of successive increases in excise duty between November 2014 and January 2016, the year-on-year growth rate of excise duty collections increased from 27% in 2014-15 to 80% in 2015-16. In comparison, the growth rate of sales tax collections was 6% in 2014-15 and 4% in 2015-16. The figure below shows the tax collections from the levy of excise duty and sales tax on petroleum products. From 2011-12 to 2017-18, excise duty and sales tax collections grew annually at a rate of 22% and 11%, respectively.
How is this revenue shared between centre and states?
Though central taxes are levied by the centre, it gets only 58% of the revenue from the levy of these taxes. The rest 42% is devolved to the states as per the recommendations of the 14th Finance Commission. However, excise duty levied on petrol and diesel consists of two broad components – (i) excise duty component, and (ii) road and infrastructure cess. Of this, only the revenue generated from the excise duty component is devolved to states. Revenue generated by the centre from any cess is not devolved to states.
The cess component was increased by Rs 2/litre to Rs 8/litre in the Union Budget 2018-19. However, this was done by reducing the excise duty component by the same amount, so as to keep the overall rate the same. Essentially this provision shifted the revenue of Rs 2/litre of petrol and diesel from states’ divisible pool of taxes to the cess revenue, which is entirely with the centre. This cess revenue is earmarked for financing infrastructure projects.
At present, of the Rs 19.5/litre excise duty levied on petrol, Rs 11.5/litre is the duty component, and Rs 8/litre is the cess component. Therefore, accounting for 42% share of states in the duty component, centre effectively gets a revenue of Rs 14.7/litre, while states get Rs 4.8/litre. Similarly, excise duty of Rs 15.3/litre levied on diesel consists of a cess component of Rs 8/litre. Thus, excise duty on diesel effectively generates revenue of Rs 12.2/litre for the centre and Rs 3.1/litre for states.
On January 17, 2020, the Ministry of Health and Family Welfare acknowledged the emergence of COVID-19 that was spreading across China. On January 30, 2020, the country’s first COVID-19 positive case was reported in Kerala. By March 11, 2020, the World Health Organisation declared COVID-19 as a global pandemic. This blog summarises the key policy measures taken by government of Kerala to respond to the pandemic.
As on April 22, Kerala has had 427 confirmed cases of COVID-19, of which 307 have recovered (highest rate of recovery in the country). Only three deaths have been recorded in the state so far.
Pre-lockdown period: Early measures for containment
Following the first confirmed case involving a returnee from Wuhan, China, the initial responses by the state were aimed at surveilling, identifying, and conducting risk-based categorisation of all passenger arrivals from China and others who had come in close contact with these travellers. As two more cases were confirmed on February 2 and 3, the state government declared a health emergency in the state.
Subsequently, a health advisory was issued to track, identify, and test all travellers with a travel history to Wuhan since January 15, 2020. Such passengers and their close contacts were to be kept in isolation for 28 days. The advisory also directed all lodging establishments to maintain a register of travellers with travel histories to corona-affected countries. A similar advisory was issued for student returnees as well. With no further confirmed cases being reported immediately, on February 12, the state withdrew the health emergency. However, a high state of response and surveillance continued to be applied.
Second wave of infections
When a second wave of infections began spreading in early March, the government took several multi-pronged measures to address the threat. The following measures were taken in this regard:
The lockdown period
On March 23, Kerala announced a state-wide lockdown till March 31. A day later, the central government announced a nation-wide 21-day lockdown.
Restrictions imposed under the state’s order included: (i) stoppage of all forms of passenger transport services, (ii) prohibition of a gathering of more than five persons, and (iii) closure of all commercial establishments, officers, and factories, except those exempted. Use of taxis, autos or private vehicles was permitted only for procurement of essential commodities or for medical emergencies. Establishments providing essential goods and services such as banks, media, telecom services, petrol bunks, and hospitals were permitted to operate.
On April 15, the central government extended the lockdown till May 3. Some of the key measures undertaken during the lockdown period are:
Administrative Measures
Healthcare Measures
Essential Goods and Services
Welfare Measures
Post-lockdown strategies – Strategies easing lockdown relaxations
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.