Slippery road: India's clean energy drive faces a tricky patch of taxation

The elephant in the room is Rs 7.5 trillion a year in revenues to the exchequer

India’s quest to get to net zero by 2070 faces its share of obstacles in the form of a slowdown in solar installations, a less than satisfactory electric vehicles scale-up, and a compulsion to build new coal generators, but the elephant in the room is a contribution of Rs 7.5 trillion in revenues to the exchequer that the oil and gas business generates on an annual basis.
 

It is true that the path to net zero helps to gradually eliminate emissions and pollutants in a nation that was ranked along with Pakistan, Tajikistan and Burkina Faso as the five countries with the most polluted air in 2023 by IQAir, a Swiss air quality technology company that collects air-sensor data.  Delhi had the dubious distinction of having the worst air, with fossil fuel-powered transport a key culprit.
 

But the journey to clean India’s air chips away at the tax edifice, assiduously built over the last few decades by successive governments, leaving less on the table for both federal and state administrations to fund capital spending and social budgets. The newer fuels, including compressed biogas, ethanol or electric, offer little to the government at the moment by way of revenues — rather, they are a drain on state finances.
 

“The impact on tax revenues will not be immediate but gradual and more in the long term,” said Swarnendu Bhushan, co - head of research at brokerage  Prabhudas Lilladher. 

States’ side of the story
 

India’s oil and gas sector has contributed 33.3 trillion rupees in the last five fiscals — exceeding the entire revenue receipts of next fiscal’s budget estimate, according to the oil ministry documents — India budgeted Rs 30 trillion in revenue receipts in the 2024-25 budget. In a different context, state revenues from oil and gas generated in the last five years are adequate to pay for four years of imported crude oil — India’s oil imports totalled Rs 12.6 trillion in financial year 2022-23.
 

Oil and gas revenues totalled Rs 7.49 trillion in 2022-23, down by 3.3 per cent to Rs 7.74 trillion in 2021-22, with the Central share at 57 per cent, or Rs 4.3 trillion. Revenues from excise on fuels dropped by 20 per cent during the period to Rs 2.87 trillion, a fallout of the government cutting excise duties on petrol and diesel in 2021 and 2022. Contributions from excise reached a record Rs 3.73 trillion in 2020-21.

The Central government reduced petrol and diesel prices by Rs 5 a litre and Rs 10 a litre in November 2021 by cutting excise taxes, and, in May 2022, cut taxes further by Rs 8 a litre and Rs 6 a litre, respectively.
 

States including Maharashtra, Gujarat, Tamil Nadu, Karnataka, Rajasthan, and Uttar Pradesh are the biggest gainers from a sales tax on petroleum products. These states — they oppose a goods and services tax (GST) regime for transport fuels — together account for 39 per cent of the Rs 3.2 trillion that states earned last financial year from levies on petroleum. Sales tax and VAT on fuels alone accounted for Rs 2.88 trillion, or 90 per cent of what states earned last financial year from the petroleum sector.
 

India, the world’s third largest oil user, consumed 223 million tonnes of oil products in 2022-23, 10.5 per cent higher from a year earlier. With much of India’s pollution contributed by power and transport — road fuels especially in urban areas — New Delhi is keen to replace as much diesel and petrol as possible with affordable alternatives.
 

Alternative scenario
 

The impact on fuel taxes from use of alternative fuels can be gauged from the proliferation of ethanol at the expense of petrol. For instance, let us study the impact of the savings in consumption of petrol on the exchequer based on government data. 

India conserved 5 billion litres of gasoline in the December 2022-November 2023 ethanol supply year, oil minister Hardeep Puri said in a government statement. Puri also inaugurated last week an Indian Oil Corporation’s retail outlet selling E100, or 100 per cent ethanol, which, if successful, will slash the demand for petrol.
 

A 5-billion-liter reduction in petrol sales is nearly Rs 100 billion, or, Rs 10,000 crore less in Central excise taxes, with the Central government collecting Rs 19.90 for each litre. State government revenues will differ because taxes vary across states. In Delhi, for instance, it impacts Rs 78.5 billion in VAT revenues.

 

But the losses are notional; in practice, oil companies charge the same price for 100 per cent petrol or ethanol-spiked petrol, meaning they collect the same taxes from the consumer even though ethanol comes under a 5 per cent GST rate. So, neither New Delhi nor state governments incurred any losses.
 

But it is a different story with electric vehicles. Every electric vehicle directly eliminates demand for petrol. Electric two-wheelers, the country’s biggest petrol guzzler, make up around 5-6 per cent of the sales now, but the government plans to increase the ratio to more than 75 per cent by 2030. India plans to increase the share of E2Ws sold to 75 per cent of all new vehicles sold by 2030 from around 6 per cent now.
 

Revenues from petrol, the second biggest consumed fuel, at 16 per cent of India’s total fuel basket, will be most affected because of the availability of affordable alternatives in biofuels and electric. Demand for petrol rose by 13.4 per cent in 2022-23 from the year earlier to 35 million tonnes, or nearly 50 billion litres. Diesel, India’s biggest fuel, accounting for 38 per cent of the country’s fuel consumption basket, will take longer to get replaced. 
 

“Indias oil demand is expected to grow until 2040 or even 2050 according to the International Energy Agency,” said Prashant Vasisht, senior vice president and co-group head, corporate ratings at ratings agency ICRA. There’s no immediate impact on tax revenues.