COVID-19 disruption may push Centre to further hike duty on petrol, diesel

The unprecedented increase in excise duty on petrol and diesel by ₹10 and ₹13 per litre on Tuesday may not be the end of the government to exercise to fleece the two petroleum products for additional revenue this year.

Sources indicated that that another ₹3-6 per litre increase in excise duty on petrol and diesel may come midway during the year if the Central government felt the need to mobilise more resources to finance additional economic recovery packages to fight COVID-19 related disruptions.

This level of increase could provide government additional revenue to the tune of ₹ 60,000 crore for full year.

In March, government had taken Parliamentary approval to raise special additional excise duty on petrol to ₹18 per litre and on diesel to ₹12 per litre but did not change the levy then. On Tuesday, special additional excise duty has been raised to ₹12 on petrol and to ₹9 on diesel. This leaves government with the space to increase excise duty on petrol by a further ₹6 per litre and on diesels by ₹3 per litre.

"This is the option with the government that could be considered later in the year depending on the need and prevailing global oil prices. If global oil and product prices remain at current levels or lower, a further duty hike this year is a strong possibility," said a source from a public sector oil marketing company.

For consumers, any further increase in duty should not impact much as retail prices may be left unchanged or marginally increased as lower oil prices would allow for absorbing any increase in price.

However, a further increase in taxes on fuel would make the product most taxed globally. The current taxes account for close to 70 % of the price of petrol and diesel. With any further increase in duty, this could reach 75-80 % level.

Higher retail price is not an option for the government at this juncture as it could push inflation.

According to Barclays the estimate is that the Central government's revenue benefit from the additional hikes in fuel taxes undertaken on Tuesday, could be as much as ₹1.4 lakh crore (0.67 % of GDP) on an annual basis. This is on top of an estimated ₹2.8 lakh crore already being collected by the Central government from the fuel tax/cess, which would bring the total contribution to the Central exchequer from fuel taxes to ₹4.4 lakh crore (2.1% of GDP). These projections assume that the demand for both petrol and diesel will fall 12 % in FY20-21.