Why does Modi sarkar want more tax on diesel than petrol?

If the Centre is keen on discouraging diesel cars, it needs to bring parity in the levy on the two fuels.

 |  Macro Matters  |  3-minute read |   06-01-2016
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Is the Union government using the fall in petroleum crude prices to make diesel less attractive for private vehicle owners and doing its bit to curb vehicular pollution? Recent increases in excise duty on petrol and diesel may seem to suggest so. Currently basic excise duty on unbranded diesel is 10 paise more than what is charged on unbranded petrol, and on branded diesel, it is Rs 1.28 more than that charged on branded petrol.

There has been a greater increase in the levy on diesel than petrol. For instance, on January 1, 2016, the excise duty on diesel was increased by Rs 2 but that on petrol was increased by only 37 paise. Similarly, when the tax on the fuels was increased on December 16, 2015, the excise duty on diesel was increased by Rs 1.17 while that on petrol went up moderately - by 30 paise.  On an aggregate, excise duty on diesel rose Rs 3.17 in two instances compared to just 67 paise on petrol.

The pattern seen in the last two instances of duty increase contrasts sharply contrast with the action in November when excise duty on petrol was increased by Rs 1.60 while that on diesel was increased moderately by 40 paise. Traditionally, petrol has been taxed more than diesel in India because diesel is the fuel used for public transportation, for moving goods across the country and by farmers to run their pumpsets for irrigation. Increase in the price of diesel is seen to have knock-on effect for inflation.

It is too early to conclude that the Union government is attempting to narrow the difference in taxes on petrol and diesel. Other than the basic excise duty, petrol and diesel attract additional and special excise duty.

Currently, the additional and special excise duty on petrol is Rs 12 compared to the Rs 6 imposed on diesel. That along with difference in the value added tax (VAT) imposed by the state governments is the reason why diesel is cheaper than petrol, even after all subsidies on both fuels were scrapped. The value added tax on petrol in Delhi, for instance, is 25 per cent. In contrast, the VAT on diesel is only 16.6 per cent.

And so, unbranded petrol retails at Rs 59.53 a litre compared to Rs 45.03 a litre of unbranded diesel.  

Nonetheless, higher increases in basic excise duty on diesel over the last one month are significant when seen in the light of all the increases in basic excise duty from November 12, 2014 on the both fuels. In total, basic excise duty on diesel has risen by Rs 10.07 since November 2014 when the government started increasing excise duty on the fuels when global prices of crude began plunging. Basic excise duty in petrol rose by Rs 10.02 during the same period.

The decision to increase taxes on diesel may actually be driven by the need to raise more revenue - consumption of diesel is about 3.5 times more than petrol and therefore every rupee of tax on diesel fetches the government more revenues than the same rate of tax on petrol.

If the Union government is really keen on discouraging fresh purchase of diesel cars, it needs to bring parity in the additional and special tax levied on the two fuels. Like the equalisation of the basic excise duty, this too will have to be gradual and incremental, and come into effect while the crude oil prices remain stable. The states too could be coaxed to have the same rate of VAT on the two fuels over a period of time.

As fuel prices rise at a future date, as they are bound to, farmers and transporters could be given any subsidy that may be required by transferring the amount directly into their bank account as it is doing for liquefied petroleum gas (LPG) and proposes to do for kerosene in 26 districts in eight states from April.

Writer

Tina Edwin Tina Edwin @tinaedwin

The writer is a Delhi-based journalist.

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