At a time when thousands of Indians are grappling with salary cuts and job losses, the centre and state governments in the country are increasing taxes charged on petrol, diesel and cooking gas to manage their own finances.
Petrol prices in India are currently at a 19-month high, while diesel is selling at its highest rate ever in some parts of the country. The prices of liquefied petroleum gas, which is used for cooking and engine fuel, have also been raised twice in two months. These rate increases are despite the fact that global crude oil prices are off their highs.
The primary reason for this recent spike is levying of higher taxation. While the Narendra Modi government at the centre has increased excise duty on petrol and diesel, several state governments have raised the value-added tax they charge.
Currently, the governments are collecting more than 200% taxes on the base price of petrol and diesel, according to Mumbai-based credit ratings agency, CARE.
The low crude prices and high taxation is helping governments make up for their revenue shortfall due to the Covid-19 outbreak this year.
It doesn’t have many options but to charge more taxes because the fiscal deficit is stretched.
In such times of distress, fuel tax becomes an extremely important revenue stream for the Indian government.
However, this time these tax increases may not help the government as much as they have in the past because petrol and diesel sales are low due to the Covid-19-related movement restrictions and the economic slump.
“Even with the increase in excise duty and VAT, the government is not expected to accrue a sizable amount of revenue given the sharp fall in consumption coupled with the apprehensions of travelling given the sign of the times and restrictions on vehicular movement enforced by different state governments,” observed CARE Ratings.
This might mean that the government won’t lower the taxes anytime soon.
In addition, the prices of Brent crude (raw material for petrol and diesel) are inching up, which may push fuel prices in India further higher.
After a sharp drop in April, the cost of Brent crude per barrel (international benchmark) is hovering near $40 mark. But it is still way below the mark of $60 at the start of the year.