Excessive inflation: the middle is unlikely to chop taxes on petrol and diesel

Retail inflation remained above the Reserve Bank of India (RBI) tolerance level (6.26%) for the second straight month in June as price pressures remained high in the food and fuel segments.

The center may not cut taxes on gasoline and diesel despite the spike in inflation as it could lead to a significant budget loss, according to official figures, without yielding much on the inflation front.

Retail inflation remained above the Reserve Bank of India (RBI) tolerance level (6.26%) for the second straight month in June as price pressures remained high in the food and fuel segments. Wholesale price inflation fell to 12.07% in June from a series high of 12.94% in the previous month, but price pressures on fuels and manufactured goods remained high. Chief economic advisor KV Subramanian recently said retail inflation could be below 6% in July.

The Union government, the sources said, cannot afford to undermine a revenue-efficient tool like the various tariffs and taxes on gasoline and diesel that have helped generate resources for infrastructure and other development spending. “Small changes in (taxes on the two car fuels) won’t change inflation expectations much. While these taxes will be reduced by 10 rupees / liter, the budget deficit impact will be 0.58% of gross domestic product (GDP) for the whole year and 0.44% for nine months, “said an official.

The RBI has put on record more than once that it would expect the center and states to calibrate taxes on auto fuels to control inflation.

Currently, the taxes on unbranded gasoline and unbranded diesel are 32.90 rupees / liter and 31.80 rupees / liter, respectively; the taxes include the property excise tax of 1.4 rupees, the road and infrastructure development tax of 18 rupees, the agriculture and infrastructure development tax of 2.5 rupees, and the special additional consumption tax of 11 rupees. imposed taxed are Rs 31.8 / liter. These taxes are a large part of the final prices of fuels to the consumer, and most of the revenue from the taxes is not shared with state governments, which are not part of the divisible pool.

Taxes were increased by 3 rupees per liter on gasoline and diesel from March 14, 2020. They were increased by 10 rupees / liter on petrol and 13 rupees / liter on diesel from May 6, 2020. The excise tax on gasoline and diesel brought the center Rs 94,181 crore in Q1FY22. Given that fuel usage could spike in the second half of the year, gasoline and diesel revenues in FY22 could be around 4 lakh crore, or about Rs 90,000 more (subject to moderation when the third wave of Covid occurs) than the budget estimate for the FY22, officials reckon.

Recently, Finance Minister TV Somanathan told FE that even with the recently announced bailout, the fiscal cost of which is estimated at around 1.5 million rupees, the budget deficit target of 6.8% of GDP for 2021-22 would be met with the possibility of revenue exceed budget and streamline spending (most departments have been asked to limit spending to 20% of BE versus the norm of 25% in the second quarter).

Robust excise tax revenue, which rose 88% year over year to 3.34 lakh crore in FY21, helped the center grow its net tax revenue by 5.9% for the fiscal year despite disruptions in economic activity due to the Covid First Wave. A higher central levy also helped states as they put sales taxes on prices of petroleum products, including Union government taxes. In FY21, the combined tax revenue of the state governments on auto fuels was Rs 2 lakh crore, the same level as in FY20. With taxes accounting for over 50% of the retail sales price, gasoline prices exceeded 100 rupees / liter in many parts of the country.

Since the weight of fuels such as gasoline, diesel and other fuels is only 2.52% in the CPI, the government expects significant inflationary pressures due to the higher fuel prices. However, its indirect effects through higher freight costs feed into most of the other prices. Lower fuel excise taxes mean higher disposable income or higher savings, which has a positive impact on the economy, said DK Pant, chief economist at India Ratings. “If producers do not bear the higher transport costs, their profitability will be reduced, resulting in lower investment and consumption. The government’s fuel tax policy will affect all three economic actors – government, producers and consumers, ”added Pant.