Home Business amount BL Explainer: Complicated fuel taxation and the controversy surrounding it

BL Explainer: Complicated fuel taxation and the controversy surrounding it


With international crude oil prices rising from the last quarter of 2021, pressure has begun to mount on the Center to reduce fuel taxes and provide relief to consumers.

How complicated is fuel taxation in India?

It’s quite complicated. The final retail price of gasoline and diesel that you buy at the gas pump has several components. The base price of gasoline, including freight, represents 56% of the final sale price of gasoline and 60% of diesel.

The Center collects excise duties on the base price, which represent 26% and 23% of the final price of petrol and diesel respectively. Excise duty is charged at a fixed rate per liter and has various components (see below). The trader’s commission amounts to an additional 4 and 3% of the selling price of the two petroleum products.

States levy a Value Added Tax (VAT) on the cost of gasoline and diesel, including excise duties and dealer’s commission. From now on, the States have carte blanche to structure and tax fuel on their territory. Many states/UTs such as Arunachal Pradesh, Delhi, Odisha and Telangana only charge VAT at a certain rate applied on the cost of petrol. Since VAT is an ad valorem tax, it will rise and fall with the market price of fuel.

Many states have attempted to address the resulting volatility in tax collection by adopting a hybrid model in which they charge a lower VAT on fuel and also apply a flat charge per liter of gasoline and diesel. Tamil Nadu, Maharashtra, Andhra Pradesh and so on have this hybrid model of fuel taxation. Other states and UT apply other innovative charges, including highway development tax, employment tax, pollution surcharge, and more.

What is the recent row over the Prime Minister’s remarks on fuel taxes?

With international crude oil prices rising from the last quarter of 2021, pressure has begun to build on the Center to reduce fuel taxes to calm inflation and provide relief to consumers.

The Center reduced central excise duty by ₹5 on petrol and ₹10 on diesel last November. He also called on states and union territories to follow suit by reducing their taxes. Many states have complied with the dictate of the Center.

Uttar Pradesh, Gujarat, Karnataka, Haryana, Madhya Pradesh and Goa have reduced state fuel tax by ₹7 per litre. Punjab achieved the largest reduction, reducing petrol tax by ₹10 and diesel tax by ₹5 per litre.

Many states such as Bihar (₹3.2), Himachal Pradesh (₹2) and Odisha (₹3) made small superficial cuts. The Prime Minister is now chastising opposition-led states for failing to cut fuel taxes.

Why are opposition-led states unhappy with the PM’s remark?

The Prime Minister specifically singled out Maharashtra, West Bengal, Telangana, Andhra Pradesh, Tamil Nadu, Kerala and Jharkhand, saying their reluctance to cut taxes is weighing on consumers.

The states stress that the Center must forfeit its revenue by further reducing its fuel taxes before asking them. They are also not happy with the way the Center is using the fuel tax levy and surcharge to keep more of the taxes with it.

They also believe the Center is being unfair in asking them to forego income from an important source at a time when the economy is still struggling with the effects of the pandemic. Fuel and alcohol taxes make up a significant portion of states’ own tax revenue.

Why do States Against the Center levy a tax on fuel?

Cess is a tax levied on basic tax and it is levied for a particular purpose, such as education tax, infrastructure development tax, etc.

More importantly, since the tax collected must be spent for a specific purpose only, the Center does not need to share the tax collected with the states.

However, if we consider the excise duty levied by the Centre, it is made up of four elements: the basic excise duty, the special excise duty, the additional excise duty (road cost and infrastructure) and excise duty for agriculture and infrastructure development. The Center only needs to share with the states the amount collected as the basic excise duty since the other elements are either taxes or subject to a surtax.

Basic excise duties represent only 4.2% of the amount collected by the Center for fuel taxes. Once 41% of the base excise tax is shared with the states, the Center retains over 98% of the tax collected on gasoline and diesel. Opposition-ruled states are crying foul over the way the Center has structured fuel taxes, depriving them of their share.

Wouldn’t it be much easier to subject fuel to the GST?

This is the right way to go and it will help you in many ways. First, it will ensure that consumers across the country pay the same tax rate. Currently, petrol prices in Maharashtra are above ₹120 per liter while they are ₹15 lower in Delhi. Such disparity will cease once fuel moves under GST, as all states will be subject to similar taxes.

Second, the Center will have to give the states their fair share of taxes collected, as the complicated central tax structure will fall under the GST.

Third, fuel tax rates could drop once it becomes subject to the GST. The current gas and diesel tax rate (Central and States combined) is 75%, well above the higher GST bracket applied to sin property.

Published on

May 02, 2022