Why Taxes on Fuel may increase in the future?

Synopsis:  Due to economic pressure, the center and states may increase taxation on fuel.

The disparity between the taxation powers of the centre and states

• A taxation is an economic tool used by the government to raise revenues. The Supreme Court of India described taxation as a “sovereign” power. Taxation powers of a state cannot be subjected to judicial scrutiny.
• Compared to States, the Centre has a lot of independence with respect to taxation powers. It has a wide scope in this regard. For example, in 2016, the Centre levied the equalisation levy to tax non-resident e-commerce service providers. The levy was neither an income tax nor a service tax. It was levied using provisions of the Income Tax Act and service tax laws.
• Whereas the subject matters over which states can raise revenue are very limited.
• In ITC Ltd. V. State of Karnataka 1985, Justice Sabyasachi Mukharji observed that “States must have the power to raise and mobilise resources in their exclusive fields”.

Fiscal Independence of states further reduced after GST

• With the implementation of GST, states have lost their autonomy to raise finances.
• The Constitution’s (101 Amendment) Act, 2016 deleted provisions empowering states to independently levy taxes.
• However, states retained their taxation powers in few items such as the sale of petrol, alcoholic liquor for human consumption, and Taxes on entertainments and amusements.

Why fuel tax will be increasing?

• First, the need for economic recovery after the pandemic will incur more public spending. High public spending means the government needs more revenues. This is one main reason why the Centre’s has kept the excise duties of fuel high.
• Second, the central government’s need for fiscal responsibility under the Fiscal Responsibility Budget Management Act has ensured that it maintains high taxes on fuel to raise resources.
• Third, the fiscal deficits of the states are also increasing at an all-time high. Provided with very less options to raise resources after the implementation of GST, even the states will try to tax fuel to raise more revenues.
• Fourth, while many states are in the run-up to election within a month, the tax on fuel would also be required to finance various promises made before the elections.

Impacts of rising in fuel prices:

• Inflation: Rising fuel prices will translate to a higher cost of goods. However, RBI has noted that that inflation rates have been revised and risks have been balanced.
• Impact on the demand for fuel:  The demand will not decrease. The lack of a robust public transport system in India makes the demand for fuel inelastic. (no change in demand even after the price increases).

Source: Indian Express