Calibrated, coordinated action is needed by Centre & states to address the issue of high fuel prices

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Context: A few days ago, Prime Minister said that several Opposition-ruled states did not heed the Centre’s call to lower taxes on petrol and diesel.

While several chief ministers contradicted the PM, the situation is particularly challenging for both the Centre and states as revenue from fuel taxes accounts for a sizeable share of general government revenues.

What is the revenue contribution of fuel taxes to the Centre and the States?

As per the Petroleum Planning & Analysis Cell,

– For Centre: The sector’s contribution to the Union government exchequer stood at Rs 4.55 lakh crore in 2020-21, up from Rs 1.72 lakh crore in 2014-15.

– For states: In the case of states, it rose from Rs 1.6 lakh crore to Rs 2.17 lakh crore over the same period.

States are likely to face a revenue shortfall this year as the collections through the GST compensation cess will possibly cease at the end of June. Thereby, lowering of sales tax/VAT on POL (petroleum oil lubricants) products will be fiscally challenging.

What is the way forward?

Since the revisions began in March, Oil Marketing Companies (OMCs) have raised prices of petrol and diesel by Rs 12 and Rs 10 per litre respectively.

The cumulative price of fuel includes an excise duty levy of Rs 27.9 and a VAT of Rs 17.13 which works out to around 43% of the retail selling price.

As these taxes are levied at both the central and state level, calibrated action will be required at both levels — even the monetary policy committee has in the past called for cuts at both levels.

Also, governments at both the central and state level could perhaps consider building in some counter-cyclicality in the taxes levied i.e. cut taxes when prices are high, maintain stability when prices fall. This would factor in concerns over both revenue and inflation.

Source: This post is based on the article “Calibrated, coordinated action is needed by Centre & states to address the issue of high fuel prices” published in The Indian Express on 30th Apr 22.