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January 27, 2021

Govt earned 1.4 Lakh Cr extra from taxes on petrol & diesel

by CA Shivam Jaiswal in Circular and Notifications

Govt earned 1.4 Lakh Cr extra from taxes on petrol & diesel

The current COVID-19 pandemic has made the entire world sit up and realise that medical exigencies are unpredictable and can cause a financial upheaval that is tough to handle. With the commencement of 2020-21 financial year the effects of coronavirus have affected the stability of the economy of 150 countries – jeopardising their lifestyle, economy, impacting business and assumption of common wellbeing which we had taken for granted. The lockdown has adversely have affected service sector like banks, restaurants, food vendors, and food delivery providers.

Oil futures markets were hit with a historical anomaly in April 2020, when the May WTI Crude futures contract fell to negative $40.32. One way of understanding how the futures contract could be negative is to understand that the cost of storing oil was, at that time, very high due to months of oversupply and the total lack of demand brought on by the COVID-19 pandemic. Simultaneously, a dispute between OPEC member Saudi Arabia and Russia (not an OPEC member) led to a flood of supply hitting the market.

Coronavirus pandemic and slump in crude oil prices spoiled government’s plan to raise Rs 2.1 lakh crore in FY21 through disinvestment. The government had planned to sell stake in public sector units such as Air India and BPCL to meet the target. However, government has compensated this shortfall with an incremental revenue of Rs 1.4 lakh crore from higher taxes on petrol and diesel.

What incremental revenue would the Government earn on higher taxes?

  • A CRISIL research report stated that, with higher excise duty, which rose by Rs 13 to Rs 32.98 per litre in 2020, and with value added tax, the government is expected to earn incremental revenue of Rs 1.4 lakh crore during the current fiscal, despite petrol and diesel sales volumes declining by 10-16%.
  • Tax now accounts for over 60% of the retail selling price of petrol, compared with 47% in 2019.
  • Now that the government is also promoting usage of cleaner fuels and has to find the money to ramp up public spending, it is unlikely that the tax on petrol will come down to previous levels anytime soon.

What is the tax component on petrol?

  • Value added tax on petrol comes around Rs 19.32 per litre.
  • Other levies include dealer commission of around Rs 3.67 per litre.  
  • In 2018 and 2019, the share of excise duty on a litre of petrol was 47%.

Hikes in duty in the last year

  • The Government of 5th May, 2020 via Notification No. 6/2020-Central Excise hiked the additional duty of excise on petrol and diesel from Rs 10 per litre (it was Rs 9 per litre before March 2020) to Rs 18 per litre.
  • The Government of 5th May, 2020 via Notification No. 6/2020-Central Excise hiked the Special Additional Excise Duty on:
 Before NotificationAfter Notification
PetrolRs 10 per litre (It was Rs 8 per litre before March 2020)Rs 12 per litre
DieselRs 4 per litre (It was Rs 2 per litre before March 2020)Rs 9 per litre
  • The Government of 5th May, 2020 via Notification No. 21/2020-Customs hiked the effective rate of Road and Infrastructure Cess (RIC) collected as additional duty of customs on petrol and diesel by Rs. 8 per litre.

The hike in petrol and diesel prices have been significant, particularly while considering that the crude prices are falling and we are trying to survive in an economy where the financial condition of the consumers is unstable.

Trends in Brent Crude

  • Brent blend is the name of one of two internationally-recognized types of crude oil that are used as benchmarks for prices of crude oil.
  • Brent blend is more than half of the crude oil traded internationally, so it is a logical choice to be the benchmark for crude oil pricing.
  • Brent crude plunged to a two-decade low of $23 in April 2020, and after a roller coaster ride during the year, it had recovered to $63.6 in early January this year.
  • Today, the Brent Crude prices are at $54.78 per barrel.
  • On 18th January, 2021, fuel prices were raised by 25 paise per litre and retail petrol prices rose to a record Rs 84.95 per litre in New Delhi, Rs 86.39 in Kolkata, Rs 91.56 in Mumbai and Rs 87.72 in Chennai.
  • Today, petrol costs Rs 91.80 per litre in Mumbai, Rs 85.20 per litre in Delhi and Rs 87.85 in Chennai.

CRISIL analysis on fuel hike

  • Analysts noted that the differential between Brent prices and Indian retail fuel prices were narrow in 2018 and 2019.
  • When Brent was at US$ 56.5 per barrel in December 2018, retail prices of petrol were Rs 70.6 per litre in India.
  • When Brent increased to US$65.9 per barrel a year after steady prices, the retail prices also increased to Rs 74.7 per litre.
  • The petrol retail prices had crossed Rs 80 per litre mark for the first time in October 2018, when Brent crude had surged to $80.5 per barrel.
  • While Brent prices were hovering around $40-43 for most of 2020 after the global lockdown, the retail prices of petrol in India skyrocketed to over Rs 80 per litre in August.
  • In calendar 2021, CRISIL expects Brent crude to rise 23% on-year to an average $50-55 per barrel from $42.3 per barrel in 2020, riding on a gradual recovery in economic activity globally.
  • That would mean a 4% increase over the average closing price of December 2020.
  • CRISIL says the elevated prices of petrol due to a steep increase in taxes in the recent past is set to increase the adoption of compressed natural gas (CNG)-driven vehicles.

Components of Pump Price of Petrol and Diesel

Pump price is basically the price at which petrol and diesel is sold to the public.

The pump price includes:

  • Base Price
  • Freight
  • Price charged to dealers (excluding Excise Duty and VAT)
  • Excise Duty (includes basic excise duty, Special Additional Excise Duty and Additional Excise Duty for road and infrastructure cess)
  • Average dealer commission
  • VAT (including VAT on Dealer Commission)
  • Basic customs duty and additional customs duty

The base price of petrol is approximately at Rs 18 per litre, while the pump price is over Rs 68 (varying according to different cities). The taxes paid on petrol amount to approximately over Rs 50. Thus, an average consumer of petrol now pays over 277% in taxes to centre and states on a litre of the fuel.

The base price of diesel is approximately about Rs 18.50 a litre, while the pump price is approximately over Rs 66 a litre. Therefore a consumer pays cumulative taxes to Centre and states, by over 256%.

Let us understand the same with the help of the table below (The above figures are on approximate basis and may vary for different states as the VAT, freight varies state wise):-

CommodityBase PriceTaxes & other chargesPump Price% of taxes to base price
 (A)(B)(A) + (B)(B) / (A) *100
PetrolRs 18 per litreRs 50 per litreRs 68 per litre277%
DieselRs 18.5 per litreRs 47.5 per litreRs 66 per litre256%

It is understood that the taxes levied on petrol and diesel aid in reducing the deficits of balance of payments in the economy. But these hikes put a massive dent in the common man’s income which is necessary to be maintained in the recent times. It is also necessary that the benefits of the drop of crude oil be passed to the end consumers, which would provide them with some financial relief.

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