Recently, people have been facing lots of difficulties because of the sudden increase in petrol and diesel prices. Petrol prices crossed over Rs 100 per liter in several Indian cities over the past few weeks, putting pressure on household budgets. While the increase in prices of petrol and diesel can be explained by rising international fuel prices to some extent, the high incidence of taxes on these products also has an important role to play.

Tax effect on Fuel Prices

India meets its domestic oil demand mainly through imports. While international crude prices have risen sharply in the last six months, a major reason for the high selling price of petrol is the high levy of local taxes. The central government levies excise duty and cess on fuel, and states levy a value added tax. Taxes together constitute 58 per cent of the retail selling price of petrol and around 52 per cent of the retail selling price of diesel at present.

This means that if the price of petrol is Rs 100 per liter, taxes levied by the central government and state governments together account for Rs 58. Of this, the central government’s tax is Rs 32-33. The rest of the amount is levied by the state governments. The last time fuel prices in India surged was in 2010-2011 and 2013-2014. That too this was because the international crude oil prices rose sharp and touched the all time high.

Why government are reluctant to reduce taxes on fuel

The central government have been reluctant to reduce the fuel prices even when the international crude prices are rising because this tax is the main source for revenue. It has collected over 3.89 lakh crores in excise duty during 2020-21. This rate has grown a whopping 62 percent compared to 2.39 lakh crores in 2019-20, of which a majority is estimated to be from taxes and excise on petrol.

The increase in tax collections came despite the fact that petroleum consumption has been decreased by 9 percent due to the stoppage of movement on account of the covid-19 lockdowns. At that time, the government has decided to increase the price of petrol and diesel by Rs 10 and Rs 13 respectively. This decision came just after two months of the hike excise on petrol and diesel by Rs 3.

Inflation impact on Common Man

The rise in fuel prices has added additional pressure to India’s inflation, which crossed 6 percent in May. Earlier this month, the MPC had also flagged the impact of the high fuel prices on overall input prices. It had urged the central government and the state governments to cut taxes on petrol and diesel in a coordinated manner. India’s fuel inflation was at 11.6 per cent in May, as against 7.9 percent in April.

There are also concerns that an increase in fuel prices may have an adverse impact on excessive expenditure as households cut the latter out to accommodate higher fuel prices. As transportation is an important part in their daily life, there has been many protests to bring down the fuel prices which can be afforded by everyone.