Centre in bind but four states offer relief as fuel’s on fire

The Centre may be facing “dharm sankat (dilemma)” over record fuel prices. But four states have taken the lead with tax cuts to offer consumers relief and show the Centre that spiralling pump prices have less to do with rising crude but is more because of high levies.

On Sunday, poll-bound West Bengal became the latest to join the band, reducing VAT by Re 1 on petrol and diesel. Rajasthan was the first to move on January 29, reducing VAT from 38% to 36%.

Assam, which too is going to polls, followed suit on February 12 by withdrawing additional tax of Rs 5 imposed last year to fund fight against Covid-19 pandemic.


Meghalaya has given the biggest relief of Rs 7.40 on petrol and Rs 7.10 on diesel, first with a rebate of Rs 2 followed by VAT reduction on petrol from 31.62% to 20% and from 22.95% to 12% on diesel.

But so far, the Centre has refused to cut excise duty it had cumulatively raised by Rs 13 a litre on petrol and Rs 16 on diesel between March and May 2020 when India’s crude purchase cost fell to $19.9/barrel as the pandemic shut down economies. It has, instead, blamed India’s dependence on oil imports and producers controlling output for fuel prices spiralling.

Oil minister Dharmendra Pradhan pointed fingers at the OPEC-Plus, saying the grouping “backtracked” on an “understanding” that production would be raised from January. On Saturday, finance minister Nirmala Sitharaman said the situation presented “dharm sankat (dilemma)” for the government.

So how much impact does crude have on pump prices? Consider: Petrol sold for Rs 89.21 and diesel Rs 79.70 a litre in Delhi -- the reference market -- on Sunday, when India purchased crude at about $63/barrel. On the same day a year ago, petrol cost Rs 71.89 and diesel Rs 64.65 when crude averaged $54.63/barrel for the month.?

This means pump prices have risen by 24%, even though the price charged to dealers have changed marginally and crude has become costlier by only 15% in a year.

The fly in the ointment is tax. Central excise on petrol has risen 64% from Rs 19.98 to Rs 32.90 and 74% from Rs 18.83 to Rs 32.90 on diesel.

Similarly, VAT on petrol has increased from Rs 15.25 to Rs 20.61 on petrol and from Rs 9.48 to Rs 11.80 on diesel. While excise duty remains the same, pump prices vary in states because of difference in VAT.

The Centre’s present refusal to give tax relief is unlike October 2018 when excise duty was cut by Rs 1.50 and state-owned fuel retailers were asked to give rebate of another after petrol prices hit the Rs 80 a litre-mark and diesel Rs 77 as India’s crude cost rose to $80 a barrel. Some 18 states too had lowered VAT, altogether reducing prices by about Rs 5 per litre.