The 5 per cent customs duty on crude oil imports has been abolished. This measure alone will lead to a revenue shortfall of Rs 15,500 crore in the remaining 10 months of the fiscal. Simultaneously, the customs duty on imported petrol and diesel has been cut to 2.5 per cent, from 7.5 per cent, while it has been slashed to 5 per cent from 10 per cent on other petroleum products. The impact of these cuts will amount to Rs 500 crore.
In addition, the Re 1 cut in central excise on petrol and diesel will set back revenues by Rs 6600 crore in the current fiscal. At the momment, excise duty on petrol is Rs 14.78 per litre, while it Rs 4.5 per litre on diesel.
Among other measures, the government is also going to issue bonds to public sector oil marketing companies to the tune of Rs 94,600 crore in 2008-09. This is likely to add to the central government's fiscal deficit for 2008-09. Including the oil bonds, treated as an off-Budget liability, the fiscal deficit as a percentage of GDP is expected to rise to 4.3 per cent. The government had estimated that the fiscal deficit (excluding off-Budget items) would be retained at 2.5 per cent in 2008-09, lower than the actual 2.8 per cent in 2007-08.
Giving details of the impact, revenue secretary PV Bhide said it was too early to say whether bouyant tax collections would make up the revenue shortfall on account of today's decisions. "We will have to wait (for the impact to be clearer)", he said. Finance Ministry officials indicated that some expenditure curbs could be considered to offset the impact of the duty cuts.
However, the revenue loss is likely to be partially offset by lower subsidy that the government gives to oil companies through oil bonds. "The increase in petroleum product prices will reduce the subsidy being given by the government and will partially offset the duty cuts," said Satya Poddar, partner, Ernst & Young.
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The petroleum sector contributed Rs 60,298 crore or 48 per cent of total central excise duty collections of Rs 1,25,000 crore in 2007-08. Customs duty on petroleum products contributed Rs 18,190 crore, which is 17 per cent of the total customs duty collection of Rs 1,04,000 crore in 2007-08. Excise duty collection from petroleum products grew a modest 4 per cent in 2007-08, while customs grew 30 per cent.
Consequent to the duty cuts, the Central Board of Excise and Customs will be under pressure to ramp up excise and customs duty collections to meet the target of Rs 1,37,874 crore and Rs 1,18,930 crore respectively in 2008-09.
With centre doing its part to help oil companies, the states are likely to cut sales tax on petrol and diesel to moderate the impact of the fuel price increase. States levy sales tax of 20-33 per cent on petrol and 9-26 per cent on diesel. With retail prices going up, the sales tax collections will also go up substantially. Petroleum sector contributes about Rs 65,000 crore to states revenue (including the share from central pool).
Some states like Delhi levy a sales tax of 12.5 per cent on diesel and 20 per cent on petrol. "It is possible for states to move towards a uniform rate of 12.5 per cent on sales of diesel and 20 per cent on petrol," sources added.