Taxing Petroleum Products

Global crude prices reached a trough of $21/barrel (bbl) in April 2020. Since then, these increased marginally but have remained below $40/bbl on average. However, India’s retail prices of petroleum, oil and lubricant (PoL) products have remained high during this period due to the impact of central and state taxes. This has given rise to the paradoxical and unexpected situation where low global crude prices have been accompanied by high retail prices of PoL products in India. In fact, the centre and states have competed to share the revenue space created by the lower global crude prices without passing on any benefit to the consumers and the users. The central government is in a position to pre-emptively increase excise duties¹ on PoL products. It also has the option to increase either the basic excise duty which is shareable with states or special additional excise duty and additional excise duty which are not shareable with the states.

The dynamics of these changes has significant implications for the sharing of the revenue space between the centre and the states. This trend was driven by erosion of the buoyancy of centre’s gross tax revenues (GTRs) as also the weak revenues of the states in 2019–20 and in the current year. With both the central and state governments increasing taxes on PoL products under their respective control, their retail prices have increased in the recent months. This has the potential of impacting inflation th­r­o­ugh the cost side and may also eventually hamper the growth momentum.