Sustainable fuel taxes

Context: The Union government reduced the excise duty on petrol by Rs.5 a litre and on diesel by Rs.10 a litre.

Issues associated with India’s fuel taxation regime

• Politicisation of price of petrol and diesel through arbitrary taxation: On back of continuing nexus between politics and fuel prices, that was sought to be avoided by deregulation of prices charged by state-run oil-marketing companies.

• Back in a situation where fuel prices are the subject of political disputation: As a large proportion of the price at the pump is determined by taxes.

• Environment vs livelihood debate: Current level of taxes makes sense in terms of managing India’s carbon emissions, and encouraging a shift towards more sustainable forms of mobility.
• But at the same time, it puts an extra burden on common man and its impacts are visible at all levels of economy. Eg. Slump in auto sales recently.
• Fiscal vulnerabilities: Higher dependence on fuel taxes to meet government expenditure makes government finances vulnerable to political pressures and increases longer-term fiscal risks.

Way forward

• Towards a more comprehensive and less fuel tax arbitrary structure: Portion of the current fuel tax burden can be brought under the GST; 
• Rest can be a transparent carbon tax that is shared between the Union and the states or directed towards climate-sensitive infrastructure, whether serving agriculture or mobility.
• Arrest recent trend towards depending upon fuel taxes to fill holes in government budgets: High taxes should stand on their own as being justified by the need to accelerate India’s green transition; 
• They should not be a crutch for improvident governments.

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