Excise on fuels may go up by upto ₹8 per litre to fight Covid-19

The government has decided to raise excise duty on petrol and diesel significantly, by upto ₹8 per litre, to mobilise additional resources that would be required to fight the Covid-19 pandemic.

In amendments introduced in the Finance Bill 2020, the Finance Ministry has proposed to raise special additional excise duty on petrol to ₹18 per litre from present ₹10 per litre and on diesel to ₹12 per litre from the present ₹4 per litre. The said changes have been made by amending the eighth schedule of the Finance Act 2002.

It is not clear whether the entire ₹8 per litre increase in special additional excise duty would be used as cap to raise duties upto that level or the government would notify the entire increase at one go.

If this happens, the retail price of petrol and diesel could shoot up by ₹5-6 per litre as the remaining amount may be absorbed by public sector oil marketing companies who have been daily reducing the price of two petroleum products in line with global fall of oil prices.

Sources said that a notification with changes in duty structure on petrol and diesel may come later.

But for the government, a ₹8 per litre tax would be a bonanza that would increase its annual excise collections from the sector by a whopping ₹1,20,000 crore. This, government officials feel, along with savings of over $ 15-20 billion in oil import bill in FY21, will provide enough room to bring the economy back on track after Covid-19 fight.

Along with increase in cap/threshold on special additional excise duty, a new ceiling has also been fixed for additional excise duty (road and infrastructure cess) levied on petrol and diesel. This has also been raised by ₹8 per litre on the two products to ₹18 per litre.

But any resultant increase in retail price of the two products could have a negative impact on the economy, which is already facing a slowdown. Price rise of auto fuels could have a multiplier effect, raising prices of several essential products and services and pushing up inflation.

In February, the consumer price inflation has fallen to 6.58 per cent but this could begin to rise again if petrol and diesel prices are raised.

On March 14, the government had raised excise duty on petrol and diesel by ₹3 per litre, the highest in the five years, taking advantage of the low global oil prices to boost its coffers. Through this increase, the centre, could gain in excess of ₹45,000 crore of revenue for the full year.

The increase of ₹8 per litre in excise duty will be the highest in the two tenures of the NDA government. It will follow the ₹3 per litre increase in duty on March 14, and another ₹2 per litre increase in excise/cess proposed in 2019 Union Budget. Before these increases, petrol and diesel price went for a series of nine hikes in quick succession between 2015 and 2016. There were, however, cuts of ₹2 per litre twice on both petrol and diesel in October 2017 and again in October 2018.

At present, the total central excise duty on petrol stands at ₹22.98 per litre and on diesel, at ₹18.83 per litre. With ₹8 per litre increase these would increase substantially to ₹30.98 per litre on petrol and ₹26.83 on diesel. In addition, states also levy VAT on the two products. Petrol and diesel has not been so far included under the GST.