Why Taxes on Petrol and Diesel Are Likely to Stay High - Vivek Kaul's Diary
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Why Taxes on Petrol and Diesel Are Likely to Stay High

Jun 12, 2018

  • Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone. -- Frédéric Bastiat

In the recent past there has been a lot of hungama, for the lack of a better word, on the high prices of petrol and diesel. Most people would pay a lower price for petrol and diesel than a higher price. Like is the case with onions, people don't like the idea of paying more for fuels either.

Other than oil prices going up, high taxes on petrol and diesel are also responsible for the high price of the fuels. In fact, the central government as well as many state governments have increased the taxes on petrol and diesel, starting in late 2014. (In order to read in detail about the pricing of these fuels, you can click here and here).

It has been suggested that the governments need to cut taxes on petrol and diesel and help lower their prices. The reasoning offered behind this suggestion is very solid. As the oil price started to fall from mid-2014 onwards, the governments stepped in to increase the taxes on petrol and diesel and captured a good chunk of the fall in price.

Now that the oil price has gone up, with the Indian basket of crude oil going at around $75 per barrel, it is only fair that the governments cut taxes, and offer some relief to the consumers.

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The question is that are the governments really in a position to cut taxes on petrol and diesel? While the ability of every state government to cut taxes is different, on the whole we can safely say that the governments are really not in a position to cut taxes on petrol and diesel.

The answer lies in Figure 1, which basically plots the total expenditure of the central government as well as the state governments, over the years, as a proportion of the Indian gross domestic product (GDP).

Figure 1:

As can be seen from Figure 1, the total expenditure of central and state governments jumped from 26.3% of the GDP in 2014-2015 to 29.2% in 2016-2017. Data for 2017-2018 is not currently available. But it is safe to say that in 2017-2018, the total expenditure of central and state governments would have gone up as a percentage of GDP, in comparison to 2016-2017.

We say that simply because many state governments have waived-off farm loans. This has increased the expenditure of the state governments. The governments need to compensate the banks which had given these loans.

Also, it is worth remembering here that state governments have taken on debt of state electricity boards, as a part of the UDAY reforms. These debts need to be repaid. This has also pushed up the total expenditure of the state governments.

All this needs money. And governments earn money through taxes. This explains why taxes on petrol and diesel are likely to stay high in the months to come. We do not have data for the total expenditure of state governments and the central government for 2017-2018, because the total expenditure data for the state governments is not available.

What is available is the total expenditure data for the central government. How do things look on that front? Take a look at Figure 2, which basically plots out the central government expenditure as a proportion of the GDP, over the years.

Figure 2:

As is clear from Figure 2, the central government expenditure as a percentage of the GDP, has been coming down over the years. It has fallen from 14.9% of the GDP in 2011-2012 to 13.2% of the GDP in 2017-2018. During the current financial year, it is expected to fall further to 13% of the GDP.

So, does this mean that the central government is in a position to cut taxes on petrol and diesel, which make up for a significant chunk of the revenue that it earns through taxes. The answer again is no.

The central government shares a major portion of the taxes it collects, with the state governments. And given that state governments need more money in order to finance their expenditure, the central government needs to collect as much tax as it possibly can.

Also, it is worth remembering here that the Bhartiya Janata Party, along with governing the country, is also a part of many state governments. Given this, the central government wouldn't want to deny the state governments their fair share of revenue.

Of course, there is a corollary that we need to state here. All this will remain true as long as we are a few months away from 2019 Lok Sabha elections. If the oil price continues to remain high even then, the government(s) might be forced to cut taxes on petrol and diesel. Voters tend to have a short-term memory. Hence, cutting taxes right now and jeopardizing the finances, does not make sense for the governments.

But when the question is of winning an election, every trick available will be used.

Stay tuned!


Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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3 Responses to "Why Taxes on Petrol and Diesel Are Likely to Stay High"

Subramanian N Iyer

Jun 13, 2018

Cutting the price is one issue. I always consider that the Government is the greatest mafia. Following once instance will establish that fact. During the Gulf War, on oil a gulf surcharge of 25% was levied in the year 1991 by the then Chandrasekhar Government. The gulf war was over within 15 days. However the surcharge was never reversed. Imagine how much money has been looted by all the successive governments from the public. Had the surcharge been reversed then, the price of petrol would have been automatically cheaper by 25% today. In no forum , this is discussed. This indicates the short memory of everyone.

Like (2)

SP ANANTHA Krishna Swamy

Jun 12, 2018

Any tax should at high range shall be linked to income. Presently the price of Petrol and Diesel have become due to irrelevant high taxation. It is a burden for poor and middle class people. Due to the double price of Diesel transportation cost of all goods also increased. Affecting less income group people by taxes is not a wise decision. Business class people who have earned crores and avoided taxes are not caught.How they have purchased properties valued crores by declaring meagre income in their returns. When so much of money is required for Govt. Taxevaders should be booked with heavy penalties. When Govt. requires more money why Corporate Tax is reduced instead of increasing. Ordinary salaried people are charged with 30 percent IncomeTax for Income above Rs.10 lakh. Value of the money is very much reduced.Petrol and Diesel should not be taxed more than 18 percent.

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Jun 12, 2018

What about the money recovered or confiscated from shell companies, additional revenue from increased tax compliance and the effects of demonetisation, besides the few high profile raids and huge haul during the recent elections? where have they gone? and cant they be substitute?

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