How much tax you actually pay when you buy petrol, diesel

Higher oil prices, while not having an impact on Centre’s revenues due to fixed tax rate, are pushing up states’ sales tax revenue.

When you buy a litre of petrol, the value-added tax (VAT) levied by your state gets applied on the price inclusive of Union excise duty, and in the case of Delhi, you end up paying Rs 5.3 per litre as a state tax on a central tax.

Though the amount is different across states, the situation is not.

Due to this double taxation, Indian consumers paid about Rs 1.2 trillion as VAT on excise duty -- as a tax on another tax -- on retail consumption of petrol and diesel in the two years (2016-17 and 2017-18), shows a Business Standard analysis of fuel taxes data for 17 states.

This is about a third of states’ revenues from fuel VAT in the last two years.

To put this in perspective, the magnitude of revenue from double taxation is such that it is equivalent to about a fifth of the states’ interest payments, according to the analysis.

Thought there is near certainty among states that this cascading would be removed once fuel taxes are subsumed under the Goods and Services Tax (GST), most state officials that Business Standard spoke to are confident that the revenue shortfall after GST inclusion, if any, would be fully compensated by the Centre.

“The exercise of bringing fuels under the GST would be revenue neutral for states, while price neutral for consumers. The thinking that fuels under GST would reduce retail prices is flawed,” a senior official from Bihar state government told Business Standard.

Referring to prevalent international practices, he added that “there would probably be a compensation levy over and above the GST, which would be non-input-tax-creditable.”

To give an accurate estimate on how much tax a consumer pays on an already existing tax, consider this.

An oil marketing company sells a litre of petrol at Rs 37.89 to dealers.

On that, the dealer applies his commission, while the Centre applies its excise duty, at a fixed rate of Rs 19.48 per litre.

On this landed price, the state applies its VAT (27 per cent in Delhi), which gets applied on the excise duty, resulting in double taxation.

The Union government earned about Rs 4.5 trillion as fuel excise revenue in the last two years, while states put together earned Rs 3.2 trillion from fuel VAT, of which, about Rs 1.2 trillion was a tax-on-tax.

Experts say this was usual practice for all products in the pre-GST regime.

The factory-gate price of a product, say hair oil, was inclusive of the excise duty. VAT or sales tax was levied on the price inclusive of the excise duty.

The transition from such a cascading of a multitude of taxes to a non-cascading GST was simpler for non-petroleum products.

Higher oil prices, while not having an impact on Centre’s revenues due to fixed tax rate, are pushing up states’ sales tax revenue.

This might be another reason why states are reluctant to the GST-petroleum reform, and are expecting the Centre to formulate a policy that compensates them well.

The revenue to the Centre from taxes on petrol and diesel reduced in the second half of 2017-18 since the excise duty was slashed by Rs 2 per litre in October 2017.

Crude oil price for Indian basket has risen 23 per cent since the beginning of the financial year to touch $78.1 per barrel on May 22.

As state levies ad valorem tax, the rise in base price of fuel (including excise duty) commensurate with the rise in crude oil price increased the tax collected.

On July 1, 2017, the base price for petrol was Rs 25.6, while the landed price in state, including excise duty and dealer’s commission, was Rs 49.6 per litre. A 27 per cent VAT in Delhi gave Rs 13.4 as revenue per litre to Delhi.

Almost a year later, on May 23, a bigger base price (courtesy global crude prices) of Rs 37.8 per litre took the landed price in state to Rs 60.8. State earned Rs 16.4 per litre, or 20 per cent more revenue than a year ago.

Officials from Maharashtra said that VAT on petrol and diesel would vanish once it gets subsumed under the GST.

“But we would get the entire compensation from the Centre since we have been guaranteed for it under the Act,” he said.

Photograph: Mukesh Gupta/Reuters