Centre cuts excise by Rs 5 on petrol, Rs 10 on diesel, effective Diwali

The Centre has announced a reduction in excise duty on petrol by Rs five a litre and diesel by Rs 10 a litre. The move, which comes into effect from Thursday when Diwali will be celebrated, is likely to give a boost to consumption, besides bringing down input costs for farmers and businesses.

“Prices of petrol & diesel will thus come down accordingly,” the finance ministry said in a statement in New Delhi.

The ministry also urged the states to commensurately reduce VAT on the two fuels to give relief to farmers.

Retail price of petrol has crossed Rs 100 a litre in all the four metropolitan cities as on November 3, while that of diesel is over Rs 100 per litre in Mumbai, Kolkata and Chennai. It was Rs 98.82 in Delhi.

The ministry said the excise duty reduction on fuels will boost consumption and keep inflation low, helping the poor and middle classes. “Today’s decision is expected to further spur the overall economic cycle,” it said.

The ministry said the reduction in excise duty on diesel will be double that of petrol and pointed to the fact that the farmers have, through their hard work, kept the economic growth momentum going even during the lockdown phase.

“The massive reduction in excise on diesel will come as a boost to the farmers during the upcoming Rabi season,” the statement said.

In recent months, crude oil prices have seen a global upsurge, leading to increase in domestic prices of petrol and diesel in recent weeks and exerting inflationary pressure. The world has also seen shortages of all forms of energy.

“The government has made efforts to ensure that there is no energy shortage in the country and that commodities such as petrol and diesel are available adequately to meet our requirements,” the ministry said.

It said driven by the enterprising ability of India’s aspirational population, the economy has witnessed a remarkable turnaround post the Covid-19 induced slowdown. All sectors of the economy – be it manufacturing, services or agriculture – are experiencing significant upward economic activity.

“To give a further fillip to the economy, the Government of India has decided to significantly reduce the excise duty on diesel,” it said.

Experts said increase in consumption and tax buoyancy will help offset excise duty cuts on fuels to an extent.

Aditi Nayar, chief economist at Icra, said based on the available data on total tax collections in the first half of the current financial year, she had expected the gross tax collections to exceed the Budget Estimates by Rs two trillion in the current financial year. “This will mitigate the impact of the excise duty cut,” she said.

Devendra Pant, chief economist at India Ratings, said with petrol and diesel consumption growth coming back on track, the hit on excise collections will be minimised. Other tax buoyancies will help in containing excise loos from petrol and diesel, he said.

Currently, the basic excise duty of the Centre on petrol stands at Rs 1.40/litre, special additional excise duty of Rs 11 a litre, agriculture infrastructure and development cess of Rs 2.50 per litre and additional excise duty (road and infrastructure cess) of Rs 18 a litre.

The basic excise duty on diesel stands at Rs 1.80/litre, special additional excise duty at Rs 8, agriculture infrastructure and development cess of Rs 4 and additional excise duty (road and infrastructure cess) at Rs 18.

These rates lead to higher excise duty collections by the centre. In financial year 2019-20, the Centre raked in Rs 2.2 trillion from excise duty on auto fuels. This rose to Rs 3.73 trillion during 2020-21. The higher collections came after the centre hiked excise duty by Rs 13 per litre on petrol and Rs 15 per litre on diesel in two installments over March 2020 and May 2020.

The collections touched Rs 72360.79 crore in the first quarter of the current financial year, according to the Petroleum Planning and Analysis Cell.

As far as states are concerned, Delhi too had hiked VAT from 27 per cent to 30 per cent on petrol and 16.75 per cent to 30 per cent on diesel in May 2020. But the VAT on diesel was trimmed back to 16.75 per cent in July 2020. The VAT on petrol has been maintained at same levels in the state.

For most of 2016-17, some 56 per cent of the excise duty on auto fuels was levied as cess which was not shared with the states. The rest of fuel revenues went to the kitty, which was shared with states.

But in 2020-21, less than 10 per cent of excise taxes went to that kitty. In other words, the Centre now keeps much more of the tax collected on auto fuels with itself.