At least 19 Indian states can reduce levies on petrol by Rs.3.23 a litre, but will they?

Diesel and petrol have become costlier in India and commoners are finding it difficult to pay higher prices. The Congress Party called the Bharat Bandh to fight against the Central Government that has failed to control fuel prices. 21 local parties also extended their support to the bandh called the Congress Party on Monday, 10 September 2018. Only three states have declared some relief to fuel consumers but many states are yet to decrease fuel rates.

Sales Tax cut in Some States

The State Government of Rajasthan reduced its sales tax (Value-added Tax) on diesel and petrol by 4%. Similarly, the State of Government of West Bengal cut the value-added tax (VAT) on diesel and petrol by Rs.1 per litre. The State Government of Andhra Pradesh also reduced the sales tax on diesel and petrol by Rs.2 per litre. In India, both diesel and petrol are taxed by the State and the Central Governments. The BJP Government increased excise duty many times since the day it came into power.

As of early September 2018, excise duty on a litre of petrol was Rs.19.48 whereas excise duty on a litre of diesel was Rs.15.33. The tax levied by the government remains unchanged throughout the country. This is not the case with the sales tax that tends to change from one state to another. The higher the sales tax, the higher will be the fuel price and vice versa. Owing to a higher sales tax, petrol is very expensive in Mumbai, the capital city of Maharashtra and financial capital of India. Fuel prices in Delhi, the national capital, are lower compared to Mumbai, Kolkata, and Chennai.

Aftermaths of the SBI Research

According to the computation made by State Bank of India (SBI) research, states are likely to earn additional revenue of Rs.22,000 crore on account of an increase in petroleum prices. When the cost of crude oil goes up by $1 per barrel, the average gain for the major 19 states worked out to be Rs.1,513 crore. The BJP-ruled Maharashtra made additional revenue of Rs.3,389 crore, which is the highest earnings among the major 19 states; followed by Gujarat, which made additional revenue of Rs.2,842 crore. The states could cut petrol rates by Rs.3.20 a litre and diesel rates by Rs.2.30 a litre without impacting their revenues, the research conducted by SBI revealed.

By how many rupees can petrol prices be reduced by the major 19 states?

Maharashtra can cut petrol prices by Rs.4.3 a litre whereas Punjab by Rs.3.8 and Tamil Nadu by Rs.3.5. Petrol rates can be cut by Rs.3.4 a litre in Rajasthan. They can be reduced by Rs.3.9 a litre in Andhra Pradesh and Madhya Pradesh. In Kerala and Karnataka, petrol prices can be lowered by Rs.3.3 a litre. They can also be reduced by Rs.3 a litre in Uttarakhand, and Jammu and Kashmir. Likewise, Haryana, Chhattisgarh, and Uttar Pradesh can bring down the price of petrol per litre by Rs.2.90 without affecting their earnings. Petrol rates may also be reduced by Rs.2.8 a litre by the State Governments of Jharkhand, West Bengal and Gujarat. Moreover, Himachal Pradesh, Orissa and Bihar could consider reducing petrol rates a litre by Rs.2.7, according to the SBI research.

By how many rupees can diesel prices be reduced by the major 19 states?

In Maharashtra and Odisha, diesel prices may be brought down by Rs.2.7 a litre, while in Jharkhand and Madhya Pradesh, they can be decreased by Rs.2.5 a litre. The Government of Andhra Pradesh has a chance to reduce diesel rates by Rs.3.1 a litre. They can also be cut by Rs.1.8 a litre in Punjab, Uttar Pradesh and Uttarakhand and by Rs.2.6 a litre in Rajasthan, Tamil Nadu and Kerala. The newly formed State Government of Karnataka has a chance to reduce the price of diesel by Rs.2.2 per litre. Likewise, the State Governments of Jammu and Kashmir, and West Bengal can diminish the rate of diesel per litre by Rs.1.9. Diesel rates per litre could be decreased by Rs.2.8 in Gujarat and Chhattisgarh, by Rs.1.9 in West Bengal, Rs.2.0 in Bihar and Rs.1.6 in Himachal Pradesh.

Will the major states actually reduce fuel prices?

The question is, will the states reduce fuel prices? The major states may not reduce both diesel and petrol rates in order to manage their unpredictable expenditures such as agriculture mortgage waiver in Karnataka, Uttar Pradesh, Maharashtra, etc. Fuel rates on Thursday, 13 September 2018, crossed their previous high, with petrol rates touching the Rs.90 mark in the city of Mumbai. Petrol rates and diesel rates were up by 13 paise and 11 paise respectively. Since March 2018, petrol rates have soared by Rs.5.60 a litre and diesel rates by Rs.6.31 a litre in the national capital, Delhi.

As mentioned earlier, the increased fuel prices are likely to provide the states with windfall revenues around Rs.22,700 crore above the budget predictions for the present financial year. The additional revenues have a positive influence on the state funds that may reduce the financial deficit of the states by 15 to 20 base points. Karnataka, Tamil Nadu, Madhya Pradesh, Rajasthan, Maharashtra and Punjab have the space to reduce petrol prices by Rs.3 a litre and diesel prices by Rs.2.5 a litre. The SBI report pointed out that a cut by the State Government of Rajasthan and the State Government of Andhra Pradesh has already peeled rates.

As per the SBI report, if the states levy the sales tax based on the base price, which is the sum of crude oil costs, transportation overheads and the commission paid to dealers, then petrol rates will drop by Rs.5.75 per litre and diesel rates by Rs.3.75 a litre respectively. This will lead to a revenue loss of Rs.12,000 crore approximately. Even though many states have a revenue surplus, they are making use of the additional revenues to sponsor capital expenditures and interest liabilities.