Higher petrol, diesel consumption should prompt govt to cut fuel cess by Rs 4.50 a litre without impacting revenues: ICRA

A rise in petrol and diesel consumption can help the government slash cess on the fuels by Rs 4.50 a litre without impacting revenue collections of FY21, rating agency ICRA said. The reduced cess would also help cool off the pressure on inflation.

Petrol consumption is estimated to increase by 14 per cent in 2021-22 and diesel by 10 per cent on the lower base, rise in mobility and economic recovery, ICRA said. The rating agency added that it will result in an additional Rs 40,000 crore in revenue for the government through higher collections of the cess.

If the government chooses to forego this additional cess collection of Rs 40,000 crore, it can reduce the cesses by Rs 4.50 per litre, and help contain the inflation situation which has breached the Reserve Bank of India’s (RBI) target band in May 2021, ICRA said.

Petrol prices have breached over Rs 100 per litre in many places, and diesel prices are also closing in on the three-digit mark in some pockets, which has led to a wide clamour for reducing the cesses imposed on the fuels to benefit the end-consumer.

Despite demand for petrol and diesel falling 10.6% annually in FY21, the Centre’s income from taxes on auto fuels rose a whopping 55% y-o-y to Rs 3.5 lakh crore in the previous fiscal because in March and May, 2020, surcharge and cess on auto fuels were cumulatively increased by Rs 13/litre on petrol and Rs 16/litre on diesel.

ICRA’s Chief Economist Aditi Nayar said, “Higher consumption of fuels should support a rise in the indirect taxes levied on them, affording a window for a partial reversal in the cess hikes that were imposed last year.”

The Union government is estimated to have collected Rs 3.2 lakh crore in revenue from the cesses in 2020-21, which is set to grow to Rs 3.6 lakh crore courtesy the higher consumption, it said. ICRA added that the government has already collected Rs 80,000 crore in April and May, and needs to collect another Rs 2.4 lakh crore to maintain it at FY21 levels.

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