States may lose Rs 120 bn in share of central taxes over road & infra cess

Reducing the basic excise duty on petrol and diesel by Rs 2 per litre and introducing a higher road and infrastructure cess, replacing an older cess, have kept the burden on the consumer unchanged, but the move will reduce the share of tax transfers to states by about Rs 120 billion (see chart 1).

Union Finance Minister Arun Jaitley introduced the road and infrastructure cess of Rs 8 per litre on petrol and diesel, replacing the older road cess of Rs 6 a litre (known as additional excise duty) and reducing the basic excise duty on petrol and diesel by Rs 2 per litre (see chart 2).

The road and infrastructure cess will now effectively generate the same amount to the Central revenues in the next financial year, but now as cess, keeping the Central revenues from petrol and diesel unchanged (see chart 3). 

Calculations show this shift will reduce the revenues from basic excise duties, which are non-cess revenues, by Rs 280 billion in 2018-19. 

States would have received about Rs 120 billion, 42 per cent of the Rs 280 billion, had the old system prevailed.

Basic excise duties form part of the divisible pool of the Centre’s tax revenue, from which 42 per cent is shared with the states. 

Additional excise duties (previously road cess and now road and infrastructure cess) are cess while special additional excise duties are a surcharge.

Against a Revised Estimate of Rs 6.7 trillion in 2017-18, states are slated to receive Rs 7.9 trillion in 2018-19 as fiscal devolution from the Centre.

The Centre hopes to earn Rs 2.4 trillion just from various excise duties on petrol, diesel, and other fuels. Of that Rs 1.13 trillion is expected to come from the road and infrastructure cess. 

Government sources not directly associated with fiscal devolution say this tweaking will improve buoyancy and help fund roads and infrastructure, while states are free to levy ad valorem duties on the fuels.

Maharashtra leads among states in the highest value-added tax (VAT) on petrol, 43 per cent, while Punjab and Madhya Pradesh come second at 36 per cent. While Maharashtra and Punjab earn 60 per cent of their revenues from their own resources, in the case of Madhya Pradesh it is about 36 per cent (2016-17 Budget Estimate), making revenue channels such as the VAT on petrol more important for MP. 

Among bigger states, Bihar depends the most on Central devolutions. Central transfers to Bihar amount to half its overall revenues. 

States’ share in the divisible tax pool increased from 32 per cent to 42 per cent after 2015-16 in accordance with the recommendations of the Finance Commission, headed by Y V Reddy.

The divisible pool consists of all tax revenues collected by the Central government except those classified as surcharges and cess levied for specific purposes and collection charges.

Petrol consumption is increasing at a rate higher than that of diesel though diesel consumption is generally four times that of petrol (see chart 4). 

India consumed about 19.5 million tonnes of petrol and 60.5 million tonnes of diesel from April 1 to December 31, 2017. 

Extrapolating the figures for the entire financial year shows 26 million tonnes of petrol and 80 million tonnes of diesel will have been consumed.  

Assumption a growth rate of 5 per cent gives a consumption estimate of 27.3 million tonnes for petrol and 84.7 million tonnes for diesel in 2018-19. 

The National Democratic Alliance government introduced and levied various types of cess such as the Swachh Bharat cess, Krishi Kalyan cess, and infrastructure cess till the goods and services tax subsumed them all. The cess on crude oil still remains.  

The Budget has assumed the price of the average Indian basket of oil to be $65 a barrel in 2018-19. The average price in January touched $67 a barrel. 

Eyeing better road infrastructure

Source: BPCL, PPAC, Union Budget 2018-19

Source: Union budget 2018-19

Source: Union Budget 2018-19

Source: PPAC