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Why fuel prices in some States burn a larger hole in your pocket

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Rising crude oil prices are now beginning to reflect on India’s petrol and diesel prices, almost burning a hole in the common man’s pocket. The Center has increased the retail selling price of petrol and diesel nine times in the last 10 days from March 22, 2022. Petrol prices and diesel prices have both been increased by ₹ 6.40.

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A large chunk of the price that you pay for a liter of fuel constitutes taxes paid to the Center and the States. If we consider the retail selling price of petrol in Delhi, 29.2 per cent of the price is made up of taxes paid to the Center. Taxes paid to the union territory made up another 16.2 per cent.

With the rate of state taxes varying considerably, the retail selling price also varies across States and union territories. As of March 31, petrol is the most expensive in Maharashtra, Rajasthan, Andhra Pradesh, Telangana and Madhya Pradesh. Further, there is variation across cities depending on the distance from the oil depots.

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Also, Maharashtra has different tax rates for some cities. Between 2017 and 2021, all these states have hiked the tax on petrol considerably. While tax collected per liter jumped from ₹ 21.45 to ₹ 30 in Maharashtra, it was a jump from ₹ 18 to ₹ 28.22 in Telangana and from ₹ 19.47 to ₹ 30 in Andhra Pradesh. Rajasthan almost doubled the tax it collects per liter of petrol. While the tax collected was ₹ 16.81 in 2017, it jumped to ₹ 31.12 in 2021. In Madhya Pradesh, it went up by almost ₹ 9.

Rajasthan, Andhra Pradesh and Telangana charge a VAT of more than 30 per cent on the base price of petrol. The former two also have other elements that form the state tax on a liter of petrol. Currently, petrol is the cheapest in Uttarakhand (₹ 100.21), Uttar Pradesh (₹ 101.62) and Punjab (₹ 101.46).

Tax collections of Center and State

While both the Center and the States have hiked rates of taxation on gasoline and diesel between 2017 and 2021, the States have not benefited as much as the Center. While the excise duties collected by the Center jumped 62 per cent between FY18 and FY21, sales tax / VAT collected by States witnessed an increase of just 9 per cent in the period. This is due to States taxing petrol and diesel on ad-valorem basis or on a hybrid basis, the Centre’s excise duty is a flat charge per liter. States’ collections have therefore declined in periods of decline in fuel prices, while the Center would have managed to retain its revenue in such periods.

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Excise duty cut

So, should the center cut excise duty to provide relief to consumers? “There is always a scope, provided the central government is willing to take a hit in terms of excise collection. There is no right rate of excise duty, ”says Madan Sabnavis, Chief Economist, Bank of Baroda, adding that a more plausible solution will be for the states to reduce VAT.

At the same time, Hetal Gandhi, Director, CRISIL Research believes that there is no room for a tax cut right now. “Further reduction in the excise and VAT rates seems unlikely as prices have been hiked after a hiatus of nearly 4.5 months, during which crude oil prices have remained significantly elevated, although the situation remains a key monitorable,” she says.

Published on

March 31, 2022

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