Fuel Price Surge: What India Can Learn From Biden And Sunak's Tax Policies

Context: When the times change, the policy has to adapt. It is time to review India’s fuel taxation policy and raise rates on under-taxed forms of income and wealth.

Breakup of India’s fuel taxation policy

• Central and state taxes account for about 60% of the retail price of petrol and diesel.
• Petrol and diesel prices are on historic high levels today as excise on petrol has been trebled per litre, and that on diesel multiplied six-fold since 2014.
• Government stance: It cannot afford to lower taxes because it would lose desperately-needed revenue.

Issues with current high fuel prices:

     

• Dangers of large single-source revenue dependency.
• Signals towards a low level of tax revenues: Budget 2021-22 provides for central tax revenues to be 9.9% of gross domestic product (GDP), a fall from 10.1% before 2014.
• GST collections remain worrisome: As disruptions induced by pandemic is still continuing.
• Federal tensions are bound to arise as states will run out of their five years of guaranteed 14 per cent annual GST revenue increase by 2022.

Way forward

• Increasing the taxes: Lessons can be taken from policies adopted by the US and UK.
• Direct demand revival measures: Announced major spending programme on infrastructure and pay-outs to poorer sections.
• Raise taxes on rich: Proposed to double the tax rate on capital gains, increase the income tax rate for the top tier, and raise corporate taxes.
• GST reforms: Rates have to be rationalised, and the average GST rate has to be raised closer to the originally intended level as soon as the current slump is over.
• Rationalisation of fuel tax: At least a partial solution capping tax load per litre of fuel, preventing further climb in prices if oil prices increase further is need of the hour.