Agri infra cess on petrol and diesel: states suffer; centre neutral, consumers wary

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While India’s finance minister, Nirmala Sitharaman said in heer budget speech that the imposition of the agriculture infrastructure and development cess on petrol and diesel will not bear any additional burden to the consumers, the public is wary and watchful.  Retail price of auto fuels have already reached record highs, as global crude prices have inched higher on the back of rising demand and production cuts.

Petrol was at its all-time high of Rs.86.30 per litre in Delhi on Monday. In Mumbai, its close to Rs 93 a litre. The Centre has been constantly increasing cess and surcharge on petrol and diesel by Rs 13-Rs 16 a litre since March 2020. “It is anybody’s guess when the government will decide to hike excise duty again on auto fuels.  Any reduction in global crude prices in the near future is the right time for the government to hike excise duty again,” said a commuter at one of Mumbai’s petrol pumps.

The Centre has promised to reduce excise duty on petrol and diesel to an extent that the end retail price of fuel will not change for the consumers despite the 2.5% agri infra cess. The agricultural cess has been proposed to earmark the resources “to improve agricultural infrastructure so that we produce more, while also conserving and processing agricultural output efficiently,” Sitharaman stated.

To offset the effect of the new cess, the basic excise duty and the special additional excise duty (surcharge) rates will be reduced accordingly. The Centre’s tax on diesel (basic excise, surcharge and road/infra cess) is currently Rs 31.83 a litre, and the total levy after the addition of the agricultural cess will be the same.

The income of states from excise duty on the auto fuels, however, will be significantly impacted, as the adjustment to accommodate the new cess will be done by slashing the basic excise duty rates by 53% for petrol and 63% for diesel. Since cess and surcharges are not sharable with states, the states get 42% of the auto-fuel excise duty income only from the basic excise duty component.

The states levy their own VAT on petrol and diesel, which goes exclusively to the state coffers, but current high prices limit the scope of increasing VAT further. The Centre’s tax revenue from petrol and diesel, pre-devolution to the states, stands at Rs 1.31 lakh crore in first half of FY21, a whopping increase of 40.4%, even though the sales of the two auto fuels have cumulatively dipped 24.2% annually in the same period.

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