The government on Tuesday cut excise duty on petrol and diesel by Rs 2 per litre each bowing to huge public pressure.
Petrol and diesel will cost Rs 2 a litre less from Wednesday after the first excise duty cut by the Narendra Modi government comes into effect. Petrol currently costs Rs 70.88 per litre in Delhi while a litre of diesel is priced at an all-time high of Rs 59.14.Read more ↓
The decision was announced by the finance ministry in a tweet:
Why was the decision to cut excise duty taken?
Clearly, due to the rising public criticism of keeping the duty high despite international oil prices going up. The government had between November 2014 and January 2016 raised excise duty on petrol and diesel as many as nine times. In all, duty on petrol was hiked by Rs 11.77 per litre and that on diesel by 13.47 a litre in 15 months which helped government’s excise mop-up more than double to Rs 242,000 crore in 2016-17 from Rs 99,000 crore in 2014-15.
The intention was to take away gains arising from plummeting global oil prices. It came under severe criticism from various quarters, including Opposition parties, for not cutting excise duty though the international prices started to rise since early July.
“This decision (to cut excise duty) has been taken by the Government in order to cushion the impact of rising international prices of crude petroleum oil and petrol and diesel on retail sale prices of petrol and diesel as well as to protect the interest of common man,” the finance ministry has said in a statement.
The rise in petrol and diesel price, it said, also reflected in wholesale price inflation, which has increased to 3.24 percent in August 2017, as compared to 1.88 percent in July. “This also prompted the Government to act swiftly in this regard,” it said.
How will this impact the government?
The excise duty cut would cost the government Rs 26,000 crore in annual revenue and about Rs 13,000 crore during the remaining part of the current fiscal year, according to the finance ministry statement.
How will this impact oil marketing companies?
The cut is unlikely to affect their marketing margins. IOC officials say that there is no margin to be surrendered as of now. This is because of the pressure on margins has increased ever since the introduction of daily revision of petrol and diesel prices in June. The entire excise cut will be passed on to the consumer.
What does this mean for the consumer?
The consumer has emerged victorious, to put it in simple words. There has been huge pressure on the government to take a relook at the excise duty on auto fuel. Despite that, oil minister Dharmendra Pradhan had ruled out any change in the duty. However, finally the government has yielded to public pressure.
According to a report by CNBC-TV18, the Centre is also pushing state governments to affect a cut in value added tax (VAT), which will further reduce prices. It has even asked companies to cut the prices, the report said. Government officials have indicated that a price cut of Rs 5 per litre on petrol and diesel is likely, according to the report.
What are analysts saying?
Mahesh Nandurkar of CLSA has said that the move indicates that the government is under political compulsions. He says the revenue reduction by Rs 13,000 crore can have an impact on the government’s fiscal situation if the goods and tax (GST) collection does not pick up.
It is to be noted that the government’s GST collection in August, the second month of the indirect tax regime, declined marginally to Rs 90,669 crore from Rs 94,063 crore in July.
The figure does not include GST paid by 10.24 lakh assessees who have opted for the composition scheme.
The government’s fiscal deficit — difference between expenditure and revenue — as of August-end had touched 96.1 percent of the budget estimate for 2017-18, mainly due to rise in expenditure. In absolute terms, the deficit stood at Rs 5.25 lakh crore during April-August.
For 2017-18, the government aims to bring down fiscal deficit to 3.2 percent of the GDP. However, there have been calls from many to relax this target given the slowdown in the economy.
However, the cut in excise is being hailed by many as a good move. Harshvardhan Dole of IIFL told CNBC-TV18 that the move is in keeping with the government’s reform steps. It shows that the government is not pushing the oil marketing companies to cut the prices, he said.
Abhishek A Rastogi, partner, Khaitan & Co said: “The reduction of tax on the petroleum products was essential and is certainly very welcome. This will give some sigh of relief to the businesses and consumers. The other question with respect to inclusion of the petroleum products within GST remains unanswered and needs to be addressed by the GST Council at the earliest.”
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