India’s decision to cut excise duty on petrol and diesel by Rs 10 per litre has provided immediate relief to consumers, but it also raises deeper questions about the impact on government finances and the broader economy.
With global crude oil prices rising amid tensions in West Asia, the move reflects a balancing act, cushioning households today while absorbing fiscal pressure in the background.
What Has Changed?
The Centre has reduced excise duty on petrol to Rs 3 per litre, while diesel has effectively been brought to zero excise duty.
The decision comes at a time when crude oil prices remain elevated, increasing input costs for oil marketing companies (OMCs). By cutting taxes, the government has enabled OMCs to manage rising costs without immediately passing them on to consumers.
Why the Cut Matters Now
The excise duty reduction is expected to help OMCs operate closer to break-even levels, despite higher global crude prices. This, in turn, helps keep retail fuel prices stable and prevents a sudden spike in costs for households and businesses.
With Brent crude trading above $100 per barrel, the pressure on fuel pricing has intensified, making such interventions critical in the short term.
Fuel Taxes a Revenue Engine
Fuel taxes remain a crucial pillar of public finances in India.
According to data from the Petroleum Planning and Analysis Cell (PPAC), the petroleum sector generated over Rs 7.5 trillion in tax revenue in 2023-24. Of this, the Centre has earned around Rs 2.7-3 trillion annually through excise duties in recent years, while states have collected over Rs 3 trillion via VAT, reported IANS.
Fuel taxes contribute around 18-19 per cent of the Centre’s gross tax revenue. For states, petroleum taxes account for roughly 25-35 per cent of their own tax collections.
How Fuel Taxes Work
Excise duty is a fixed tax levied by the Union government on every litre of petrol and diesel. In addition to basic excise, the Centre imposes cesses such as road and infrastructure cess, which it retains entirely.
States levy VAT or sales tax, which varies across regions and adds significantly to the final retail price.
In cities like Delhi, central taxes account for around 43 per cent of petrol prices and about 37 per cent of diesel prices, with state taxes contributing a substantial share as well.
A Growing Point of Tension with States
A key concern has been the rising share of cesses and surcharges in the Centre’s excise structure. Unlike basic excise duty, these are not part of the divisible pool shared with states.
As a result, a larger portion of fuel tax revenue accrues directly to the Centre, an issue that has been repeatedly raised by state governments.
The Fiscal Cost of Relief
While the tax cut offers immediate relief, it comes at a high fiscal cost.
Market estimates suggest that every Re 1 per litre reduction in excise duty results in an annual revenue loss of Rs 14,000-16,000 crore. Based on this, a Rs 10 per litre cut could translate into a revenue loss of around Rs 1.5 trillion annually for the Centre.
This raises questions about how long such a strategy can be sustained, especially if crude oil prices remain elevated.
Impact on Inflation and Household Budgets
Fuel prices have a direct impact on inflation and household expenses.
Higher fuel costs tend to push up transportation and logistics expenses, which then feed into the prices of goods and services. Conversely, tax cuts can provide relief by containing inflationary pressures in the short term.
Following the decision, Finance Minister Nirmala Sitharaman said the move would help protect consumers from rising prices.
A Delicate Balancing Act
The excise duty cut highlights the government’s attempt to strike a balance between shielding consumers and maintaining fiscal stability.
While the immediate benefit is clear in the form of stable fuel prices, the longer-term challenge lies in managing the impact on revenues.
With crude prices still hovering above $100 per barrel, the sustainability of this approach will depend on global developments and the government’s ability to absorb the fiscal shock.
For now, the government has chosen to prioritise consumer relief over revenue considerations. But as global energy markets remain volatile, the trade-off between affordability and fiscal health is likely to become more pronounced in the months ahead.
