Diwali cheer: Centre cuts excise duty on petrol by Rs 5, diesel by Rs 10

The Centre on Wednesday announced a reduction in excise duty on petrol by Rs 5 a litre and on diesel by Rs 10 a litre. This will come into effect from Thursday, when the country celebrates Diwali, and is expected to boost consumption, and bring down input costs for farmers and businesses.

“Prices of petrol and diesel will thus come down accordingly,” the finance ministry said in a statement here. The ministry also urged the states to commensurately reduce value-added tax (VAT) on the two fuels to give relief to farmers.

The retail price of petrol was over Rs 100 a litre in all the four metropolitan cities as on Wednesday, while that of diesel was over Rs 100 per litre in Mumbai, Kolkata, and Chennai. It was Rs 98.82 a litre in Delhi.

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

In recent months, crude oil prices have seen an upsurge globally, leading to an increase in domestic prices of petrol and diesel and exerting inflationary pressures. 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.

The impact of the cut on the Centre’s coffers is expected to be muted. Experts said the 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 tax collection in the first half of the current financial year, gross tax collections could exceed the Budget Estimates by Rs 2 trillion this fiscal. “This will mitigate the impact of the excise duty cut,” she said.

Devendra Pant, chief economist at India Ratings, said the hit on excise collections will be minimal as petrol and diesel consumption is back on track. Other tax buoyancies will help contain the excise loss, he said.

At present, the basic excise duty of the Centre on petrol stands at Rs 1.40 per 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 a 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.

In recent years, the Centre has benefited from higher excise duty collections. In FY20, it raked in Rs 2.2 trillion from excise duty on auto fuels. This rose to Rs 3.73 trillion in FY21. 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 and May 2020.

The collections touched Rs 72,360.79 crore in the first quarter of the current fiscal, according to the Petroleum Planning and Analysis Cell.

For most of 2016-17, around 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.