Yesterday the Rajya Sabha and Lok Sabha engaged in a debate on the President's speech, known as the Motion of Thanks. The President's speech is a statement of the legislative and policy achievements of the government during the preceding year and gives a broad indication of the agenda for the year ahead. Close to the end of the UPA government’s term, it would be useful to evaluate the status of the commitments made in the President’s addresses. (To know more about the significance of the President’s speech refer to this Indian Express article. To understand the broad policy and legislative agenda outlined in this year's address see this PRS Blog.) The President's speeches since the beginning of the 15th Lok Sabha in 2009, have addressed reforms to the financial and social sectors, improving accountability of public officials, and making the delivery of public services more efficient.  We analyse the status of each of these commitments. Accountability in governance processes In an effort to increase accountability and transparency in governance processes, the government introduced a number of Bills.

  • The the Lokpal and Lokayukta Bill and the Judicial Standards and Accountability Bill enable individuals to file complaints against judges and other government officials for corruption and misbehaviour.
  • The Whistleblowers Bill has been introduced to protect persons who are making disclosures on corruption, on the misuse of power and on criminal offences by public servants.

These bills have been passed by the Lok Sabha and are pending in the Rajya Sabha.  The government has recently approved amendments to the Lokpal Bill, which may be considered by the Rajya Sabha in the Budget session. Public service delivery In order to make public service delivery more efficient, the government introduced the Electronic Services Delivery Bill and the Citizen’s Charter Bill.

  • The Electronic Services Delivery Bill aims to deliver all government services electronically .
  • The Citizens Charter Bill creates a grievance redressal process for complaints against the functioning of any public authority.
  • Both Bills are pending in the Lok Sabha since introduction in December 2011.
  • Related initiatives include linking the delivery of public services to Aadhaar and moving towards the cash transfer of subsidies. On January 1, 2013, the government piloted cash transfers to deliver subsidies for scholarships and pensions.

Social sector reforms: land, food security and education Broad sectoral reforms have been undertaken in land acquisition, food security and education to aid development and economic growth.

  • Land:  In 2011, the government introduced the Land Acquisition, Rehabilitation and Resettlement Bill. The Standing Committee Report on the Bill was released in May last year, based on which the government circulated a list of amendments to the Bill in December 2012.
  • Education: Elementary and middle school education saw reform in 2009 with the passage of the Right to Education Act (RTE Act). This legislation provides every child between the age of six to fourteen years with the right to free and compulsory education. As per the law, by March 2013 all schools are to conform to the minimum standards prescribed. States have expressed concerns over their preparedness in meeting this requirement and it remains to be seen how the government addresses this issue.
  • Food security: The National Food Security Bill is pending in Parliament since 2011. The Bill seeks to make food security a legal entitlement, reform the existing Public Distribution System and explore innovative mechanisms such as cash transfer and food coupons for the efficient delivery of food grains. The Standing Committee gave its recommendations on the Bill in January this year.

Financial sector reforms In order to aid growth and encourage investments, the President had mapped out necessary financial sector reforms.

  • Taxation: The Direct Taxes Code has been introduced in Parliament to enhance tax realisation. However, even though the Standing Committee has presented its report, there has been little progress on the Bill. Efforts are underway to build political consensus on the Goods and Services Tax to rationalise indirect taxes.
  • Regulation of specific sectors: A bill to regulate the pension sector has been introduced in Parliament. Other financial sector reforms include a new Companies Bill, amendments to the Banking laws and a bill regulating the insurance sector.  Amendments to the banking laws have been approved by Parliament, while those to the Companies Bill have only been passed by the Lok Sabha.

In the backdrop of these legislations, it will be interesting to see the direction the recommendations of the Financial Sector Legislative Reforms Commission, responsible for redrafting all financial sector regulation, takes. Internal security The government is taking measures to deal with internal security concerns such as terrorism and naxalism. In 2009, the President mentioned that the government has proposed the setting up of a National Counter Terrorism Centre. However, this has been on hold since March 2011. At the beginning of the 15th Lok Sabha in June 2009, the President presented the 100 day agenda of the UPA II government, in his address. Of the eight bills listed for passing within 100 days, none have been passed. In addition, the President’s address in 2009 mentioned five other Bills, from which, only the RTE Act has been passed.  In the final year of its tenure, it needs to be seen what are the different legislative items and economic measures, on which the government would be able to build consensus across the political spectrum.  

In the past few months, retail prices of petrol and diesel have consistently increased to all-time high levels.  On October 16, 2021, the retail price of petrol in Delhi was Rs 105.5 per litre, and that of diesel was Rs 94.2 per litre.  In Mumbai, these prices were even higher at Rs 111.7 per litre and Rs 102.5 per litre, respectively.

The difference in fuel retail prices in the two cities is due to the different tax rates levied by the respective state governments on the same products.  In this blog post, we look at the tax components in the price structure of petrol and diesel, the variation in these across states, and the major changes in taxation of these products in the recent years.  We also discuss changes in the retail prices over the past few years and how it compares vis-à-vis the global crude oil prices.

Taxes make up around 50% of the retail price

Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil.  The price charged to dealers includes the base price set by OMCs and the freight price.   As on October 16, 2021, the price charged to dealers makes up 42% of the retail price in the case of petrol, and 49% of the retail price in the case of diesel (Table 1).

The break-up of retail prices of petrol and diesel in Delhi (as on October 16, 2021), shows that around 54% of the retail price of petrol comprises central and states taxes.  In the case of diesel, this is close to 49%.  The central government taxes the production of petroleum products, while states tax their sale.  The central government levies an excise duty of Rs 32.9 per litre on petrol and Rs 31.8 per litre on diesel.  These make up 31% and 34% of the current retail prices of petrol and diesel, respectively.

Table 1: Break-up of petrol and diesel retail prices in Delhi (as on October 16, 2021)

Component

Petrol

Diesel

Rs/litre

% of retail price

Rs/litre

% of retail price

Price Charged to Dealers

44.4

42%

46.0

49%

Excise Duty (levied by centre)

32.9

31%

31.8

34%

Dealer Commission (average)

3.9

4%

2.6

3%

Sales Tax/ VAT (levied by state)

24.3

23%

13.8

15%

Retail Price

105.5

100%

94.2

100%

Note: Delhi levies 30% VAT on petrol and 16.75% VAT on diesel. 
Sources: Indian Oil Corporation Limited; PRS.

While excise duty rates are uniform across the country, states levy sales tax/ Value Added Tax (VAT) which varies across states.  For instance, Odisha levies 32% VAT on petrol, while Uttar Pradesh levies 26.8% VAT or Rs 18.74 per litre, whichever is higher.   Refer to the table 3 in annexure for sales taxes/VAT levied across the country.  The figure below shows the different tax rates levied by states on petrol and diesel.  In addition to the tax rates shown in the graph, many state governments, such as Tamil Nadu, also levy certain additional levies such as cess (Rs 11.5 per litre).

Figure 1: Sales tax/VAT rates levied by states on petrol and diesel (as on October 1, 2021)

image

Note: The rates shown for Maharashtra are averages of the rates levied in the Mumbai-Thane region and in the rest of the state. Only percentages are being shown in this graph. 
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

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 value of excise duty component of the price structure is fixed, the value of the sales tax component is dependent on the other three components, i.e., price charged to dealers, dealer commission, and excise duty.

Retail prices in India compared to 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 of petroleum products were 69% of the total consumption, which increased to around 95% in 2020-21.  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 two figures below show the trend in the price of global crude oil and retail prices of petrol and diesel in India, over the last nine years.

Figure 2: Trend of the global crude oil price vis-à-vis retail prices of petrol and diesel (in Delhi)

image

image

Note: Global Crude Oil Price is for the Indian basket.   Petrol and diesel retail prices are for Delhi.  Figures reflect average monthly price.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Between June 2014 and October 2018, the retail selling prices did not adhere to change in global crude oil prices.  The global prices fell sharply between June 2014 and January 2016, and then subsequently increased between February 2016 and October 2018.  However, the retail selling prices remained stable during the entire period.  This disparity in the change in global and Indian retail prices was because of the subsequent changes in taxes.  For instance, central taxes were increased by Rs 11 and 13 between June 2014 and January 2016 on petrol and diesel respectively.  Subsequently, taxes were decreased by four rupees between February 2016 and October 2018 for petrol and diesel.  Similarly, during January-April 2020, following a sharp decline of 69% in the global crude oil prices, the central government increased the excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively in May 2020. 

Sharp increase in excise duty collections

As a result of the increase in excise duty in May 2020, the excise duty collection increased sharply from Rs 2.38 lakh crore in 2019-20 to Rs 3.84 lakh crore in 2020-21.  The year-on-year growth rate of excise duty collection increased from 4% in 2019-20 to 67% in 2020-21.  However, sales tax collections (from petroleum products) during that period remained more or less constant (Figure 3).  

Figure 3: Excise duty and sales tax/ VAT collection from petroleum products (in Rs lakh crore) 

image

Note: The excise duty component in the figure includes cess on crude oil.
Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.

Share of states in excise duty has decreased over the years

Though central taxes (such as excise duty) are levied by the centre, it has only 59% of the revenue from these taxes.  The remaining 41% of the revenue is required to be devolved to the state governments as per the recommendations of the 15th Finance Commission.  These devolved taxes are un-tied in nature, states can spend them according to their own discretion.  The excise duty levied on petrol and diesel consists of two broad components: (i) tax component (i.e., basic excise duty), and (ii) cess and surcharge component.  Of this, only the revenue generated from the tax component is devolved to states.  Revenue generated by the centre from any cess or surcharge is not devolved to states.  Currently, the Agriculture Infrastructure and Development Cess, and the Road and Infrastructure Cess are levied on the sale of petrol and diesel in addition to the surcharge.  

In the Union Budget 2021-22, the Agriculture Infrastructure and Development cess on petrol and diesel was announced at Rs 2.5 per litre and Rs 4 per litre, respectively.  However, simultaneously, the basic excise duty and surcharge were reduced by equal amounts, so that the overall rate remains the same.  Essentially, this provision shifted a revenue of Rs 1.5 per litre of petrol and Rs 3 per litre of diesel from the states’ divisible pool of taxes to the cess and surcharge revenue, which is entirely with the centre.  Similarly, over the last four years, the share of tax component in the excise duty has decreased by 40% in petrol and 59% in diesel (table 2).  At present, majority of the excise duty levied on petrol (96%) and diesel (94%) is in the form of cess and surcharge, due to which it is entirely under the centre’s share (Table 2).  

Table 2: Break up of excise duty (Rs per litre)

Excise duty

Petrol

Diesel

Apr-17

% share of total

Feb-21

% share

Apr-17

% share of total

Feb-21

% share

Tax (devolved to states)

9.48

44%

1.4

4%

11.33

65%

1.8

6%

Cess and surcharge (centre)

12

56%

31.5

96%

6

35%

30

94%

Total

21.48

100%

32.9

100%

17.33

100%

31.8

100%

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS

As a result, the devolution to states out of the excise duty has declined over the last four years.   Even though the excise duty collections have increased sharply between 2019-20 and 2020-21, the devolved component has declined from Rs 26,464 to Rs 19,578 (revised estimate) in the same period.    

Annexure

Table 3: Sales taxes/VAT rates levied on petrol and diesel across states (as on October 1, 2021)

State/UT

Petrol

Diesel

Andaman & Nicobar Islands

6%

6%

Andhra Pradesh

31% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess an

d Vat thereon

22.25% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess and Vat thereon

Arunachal Pradesh

20%

13%

Assam

32.66% or Rs.22.63 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre

23.66% or Rs.17.45 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre

Bihar

26% or Rs 16.65/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)

19% or Rs 12.33/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax)

Chandigarh

Rs.10/KL cess +22.45% or Rs.12.58/Litre whichever is higher

Rs.10/KL cess + 14.02% or Rs.7.63/Litre whichever is higher

Chhattisgarh

25% VAT + Rs.2/litre VAT

25% VAT + Rs.1/litre VAT

Dadra and Nagar Haveli and Daman and Diu

20% VAT

20% VAT

Delhi

30% VAT

Rs.250/KL air ambience charges + 16.75% VAT

Goa

27% VAT + 0.5% Green cess

23% VAT + 0.5% Green cess

Gujarat

20.1% VAT+ 4% Cess on Town Rate & VAT

20.2% VAT + 4 % Cess on Town Rate & VAT

Haryana

25% or Rs.15.62/litre whichever is higher as VAT+5% additional tax on VAT

16.40% VAT or Rs.10.08/litre whichever is higher as VAT+5% additional tax on VAT

Himachal Pradesh

25% or Rs 15.50/Litre- whichever is higher

14% or Rs 9.00/Litre- whichever is higher

Jammu & Kashmir

24% MST+ Rs.5/Litre employment cess, Reduction of Rs.0.50/Litre

16% MST+ Rs.1.50/Litre employment cess 

Jharkhand

22% on the sale price or Rs. 17.00 per litre , which ever is higher + Cess of Rs 1.00 per Ltr

22% on the sale price or Rs. 12.50 per litre , which ever is higher + Cess of Rs 1.00 per Ltr

Karnataka

35% sales tax

24% sales tax

Kerala

30.08% sales tax+ Rs.1/litre additional sales tax + 1% cess 

22.76% sales tax+ Rs.1/litre additional sales tax + 1% cess 

Ladakh

24% MST+ Rs.5/Litre employment cess, Reduction of Rs.2.5/Litre

16% MST+ Rs.1/Litre employment cess , Reduction of Rs.0.50/Litre

Lakshadweep

Nil

Nil

Madhya Pradesh

33 % VAT + Rs.4.5/litre VAT+1%Cess

23% VAT+ Rs.3/litre VAT+1% Cess

Maharashtra – Mumbai, Thane , Navi Mumbai,  Amravati & Aurangabad

26% VAT+ Rs.10.12/Litre additional tax 

24% VAT+ Rs.3.00/Litre additional tax 

Maharashtra (Rest of State)

25% VAT+ Rs.10.12/Litre additional tax 

21% VAT+ Rs.3.00/Litre additional tax 

Manipur

32% VAT

18% VAT

Meghalaya

20% or Rs15.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) 

12% or Rs9.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) 

Mizoram

25% VAT

14.5% VAT

Nagaland

25% VAT or Rs. 16.04/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess 

16.50% VAT or Rs. 10.51/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess 

Odisha

32% VAT

28% VAT

Puducherry

23% VAT

17.75% VAT

Punjab

Rs.2050/KL (cess)+ Rs.0.10 per Litre (Urban Transport Fund) + 0.25 per Litre (Special Infrastructure Development Fee)+24.79% VAT+10% additional tax on VAT

Rs.1050/KL (cess) + Rs.0.10 per Litre (Urban Transport Fund) +0.25 per Litre (Special Infrastructure Development Fee) + 15.94% VAT+10% additional tax on VAT

Rajasthan

36% VAT+Rs 1500/KL road development cess

26% VAT+ Rs.1750/KL road development cess

Sikkim

25.25% VAT+ Rs.3000/KL cess 

14.75% VAT + Rs.2500/KL cess 

Tamil Nadu

13% + Rs.11.52 per litre

11%  + Rs.9.62 per litre

Telangana

35.20% VAT

27% VAT

Tripura

25% VAT+ 3% Tripura Road Development Cess

16.50% VAT+ 3% Tripura Road Development Cess

Uttar Pradesh

26.80% or Rs 18.74/Litre whichever is higher

17.48% or Rs 10.41/Litre whichever is higher

Uttarakhand

25% or Rs 19 Per Ltr whichever is greater

17.48% or Rs Rs 10.41 Per Ltr whichever is greater

West Bengal

25% or Rs.13.12/litre whichever is higher as sales tax+ Rs.1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)

17% or Rs.7.70/litre whichever is higher as sales tax + Rs 1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax)

Sources: Petroleum Planning and Analysis Cell, Ministry of Petroleum and Natural Gas; PRS.