Uneconomic Impact of Rising Fuel Taxes

Context: Petrol has become costlier by 4% and diesel by 5% over the last 18 days, with oil retailers revising pump prices.

The paradoxical trend in fuel price:

• The decline at the global level: Between March and December, Brent crude prices have fallen more than 3%.
• Rise in domestic prices: Petrol and diesel prices have climbed 17% and 15% respectively.

Issues associated with high fuel prices:

• Cascading impacts: Since fuels are not under GST, tax increases cascade into higher prices of everything.
  • Central excise duty and state value-added tax (VAT) amount to 63% and 58.6% of the retail prices of petrol and diesel respectively in Delhi.
• Inhibits growth: Higher inflation prevents the central bank from lowering interest rates, thus inhibiting growth, to the extent the cost of money inhibits growth.
• Hurts consumption: The share of indirect taxes net of subsidies in GDP goes up, hurting consumption in a year in which the poor already struggle to maintain their consumption.

Way Forward:

• Bringing petro-fuels under GST: would prevent adding a tax on tax to the price of goods and services whose input costs include fuel.
  • A Non-VAT-able cess as a top-up: to factor in externalities such as pollution, can be considered.
  • Part of input taxes paid on automotive fuels would then be creditable, creating audit trails that should be pursued diligently to boost revenues.

Conclusion: Government must strike a balance as raising taxes on fuels pushes up retail prices and puts a squeeze on the real consumption of fixed income earners, in a year seeing a rise in poverty and job losses.