Excise duty cut on fuel and graded retail price hike likely

The centre is exploring options to provide relief to consumers as global crude oil prices inched towards $120 per barrel earlier today. 

Government sources have told BT Television that the centre may consider an excise duty cut of Rs 8-10 per litre on petrol and diesel to reduce the impact of the surge on consumers.

The second option on the table involves the oil marketing companies (OMC's) gradually increasing retail prices to accommodate the recent surge in crude prices.

Brent crude have risen from $68 per barrel since November to the current levels.

This could be done in tandem with the central excise duty cut, the sources added.

Petrol and diesel prices have been left unchanged since the first week of November despite the steep rise in crude oil prices since.  "Based on the existing value added tax (VAT) and taking Brent crude price of $100-$110 per barrel, diesel and petrol prices should have been higher by Rs 9-14 per litre each as of now," a SBI Ecowrap research note said.

Sources added that the second option is more viable because if the government outright reduces the excise duty, then it will cost Rs 1 lakh crore to the exchequer. 

The situation might also be managed by passing on some prices to the consumer, central government reducing excise and states reducing VAT, the sources added.

If global crude oil prices remain elevated and hover around an average of $100 per barrel, inflation will likely increase by 52-65 basis points.

On the other hand, if the government cuts the excise duty on petroleum products by around Rs 7 per litre to prevent rates from rising, then it will incur an excise duty loss of Rs 8,000 crore per month.

"And if we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10 per cent in FY23, then the revenue loss of the government would be around Rs 95,000 crore to Rs 1 lakh crore for FY23," the SBI report added. 

Vandana Hari, founder of Vandana Insights and a noted voice in the energy space told BT Television that the government will have to find a way to cushion some of the blow of current oil prices on the consumer. "Countries around the world, even those with relatively less price- sensitive consumers, are adopting offsetting measures. The options are limited. Bringing back outright subsidies is out of the question," she said.

"If oil marketing companies are to be protected, the government will have to take a bigger tax cut. The unpredictability of the Ukraine war makes it hard to say how long the OMCs may have to bear the burden if prices are not raised. If the longer-term health and recovery of the economy is kept in view, it might make sense to raise the prices and slash taxes until some normalcy returns to the markets," she added. 

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