Uneconomic impact of rising fuel taxes

Uneconomic impact of rising fuel taxes

Petrol has become costlier by nearly 4% and diesel by 5% just over the last 18 days, with oil retailers revising pump prices from November 20.

High state and central taxes have fuelled the increase. Between March and December, Brent crude prices have fallen more than 3%, but petrol and diesel prices have climbed 17% and 15% respectively. Tax-driven increase in fuel prices raises three problems.

One, since fuels are not under GST, tax increases cascade into higher prices of everything.

Two, higher inflation prevents the central bank from lowering interest rates, thus inhibiting growth, to the extent the cost of money inhibits growth. Curtailing growth depresses jobs, incomes and welfare, besides, of course, tax.

Three, 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. 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, for example. VAT rates vary between 25% and 35% across states.

The inefficient tax regime must end. Bringing petro fuels, a universal input, under GST would prevent adding tax on tax to the price of goods and services whose input costs include fuel. A top up non-VAT-able cess to factor in externalities such as pollution is a good idea. And a part of the input taxes paid on automotive fuels would then be creditable, creating audit trails that should be pursued diligently to boost revenues.

Commodity taxes net of subsidy have gone up to 9.3% of GDP in Q2 of this fiscal from 9.2% in Q2 of 2019-20 (against 6.3% in Q1 of this fiscal and 8.72% in Q1 of 2019-20).

The government must strike a balance as raising taxes on fuels (that increases net taxes as a share of GDP) pushes up retail prices and puts a squeeze on the real consumption of fixed income earners.

It hurts the poor in a year that has seen a rise in poverty and job losses. Raising fuel taxes is easy, but the government must ask itself, is the fallout worth that felicity?