Why It’s The Right Time To Cut Petrol And Diesel Prices Drastically

One has lost count of the number of times the Bharatiya Janata Party (BJP) leaders have quoted Chanakya’s famous dictum on taxes. Seven years ago, in the run up to 2014 general election, the party’s prime ministerial candidate Narendra Modi had cited the example of a honey bee which extracts nectar from flowers without causing harm to them as a metaphor for how the country’s taxation system should ideally be.

The same analogy was presented by Union Finance Minister Nirmala Sitharaman in her maiden budget in 2019. Many other BJP leaders can also be heard regurgitating such Kautlilyan views every now and then.

This is not just rhetoric if Amit Shah is to be believed. Shah, whose meeting room proudly displays portraits of Chanakya and Veer Savarkar on the wall behind the sofa where he sits, delivered a speech in 2018 where he stated that Modi’s governance was in fact greatly inspired by Kautilya’s vision of statecraft, including on taxation.

“Giving the example of honey bees, Chanakya had said a raja (king) should tax in the same manner as honey bees extract nectar from flowers without hurting them. In this manner, neither the flowers’ beauty nor their fragrance is affected though we manage to collect honey,” Shah had said.

However, the central government’s fuel tax policy makes one wonder if the BJP’s seemingly moral and principled stand is real or it simply sees it as highfalutin jargon meant to please the base which is perennially hungry to listen to politicians deploying civilisational language.

But it’s high time that the Modi government ended tax terrorism, a word coined by the prime minister against the Congress era taxation policies. The overall tax component accruing to both the Centre and states now accounts for around 60 per cent of retail price of petrol.

In Delhi, petrol is selling at more than Rs 91 per litre out of which about Rs 54 is excise duty of the Centre and VAT of Delhi government combined. Prices are even higher in states like Rajasthan, Madhya Pradesh and Maharashtra where VAT is more.

If this is not tax terrorism what is? Obviously both the Centre and state governments of all parties are to blame for this. This is the easy money that no administration wants to let go of. There are no compliance costs to extract this price, the commodity is essential to day to day life of individuals and businesses and when every government of every political hue is in on the ‘loot’, it’s easier to continue with the extortionate taxes.

But just like most people credit the Modi government (fairly or unfairly) for everything good that happens in the country, they would blame it for anything that goes wrong whether it’s actually responsible for it or not.

As far as fuel prices are concerned, people still remember how the BJP would mock the Congress government before 2014 for rising rates even though the major factor behind them was global crude prices above $100 per barrel rather than higher taxes by the government.

In September 2013, total tax levied by the Centre and states on petrol in Delhi was slightly less than Rs 20 per litre. Today, the state government alone extracts that much in form of taxes. The Centre’s Rs 32 excise duty is extra.

Global crude oil price today is over $60 per barrel, similar to the price in November 2019. Dealer commission was same as it is now. But the excise duty has increased from Rs 19 to Rs 32 and VAT from Rs 15 to Rs 20. This increase of Rs 13 by the Centre came in effect during the lockdown when crude prices plunged by over $20. They have now rebounded but taxes have not been scaled back by the governments.

There is absolutely no justification to continue with the same tax component. Such extortionate oil taxes cannot be justified today. Global crude oil rate is moderate, dollar to rupee exchange rate is more or less the same as before, oil marketing companies are not under heavy debt or financial stress or making losses, fuel subsidies are far from a problem now unlike in the past — all the excuses given earlier to justify extremely high taxes on oil are not applicable today.

Another excuse — that prices are not in the government’s control and in fact decided by the market — are quite farcical. Oil prices are frozen at regular intervals on the government‘s direction during elections — whether it was during 2017 assembly elections in Punjab, Goa, Uttarakhand, Uttar Pradesh and Manipur in April, Gujarat assembly election in late 2017, Karnataka election in 2018 or general elections in 2019.

In fact, we should expect the same freezing to be in place by end of the next week as elections in West Bengal, Puducherry, Assam, Tamil Nadu and Kerala kick off by end of March.

The economy is returning to pre-Covid-19 normalcy. Inflation is at 4 per cent. There is no reason why the excise duty shouldn’t be cut to pre lockdown levels — both by the Centre and states.

As per a report by the ICICI securities, if excise duty is cut by Rs 8.5 per litre, the FY22 budget estimate can still be met.

In fact, the Centre should right away announce this much reduction along with the BJP ruled state governments giving additional cut of Rs 4-Rs 5 bringing petrol to below Rs 80 level. This will build pressure on non-BJP ruled states to also slash VAT.

The political genius of Prime Minister Narendra Modi has been that he never allows buildup of public resentment against him or his government. Oil prices are a thorny issue and they are starting to sting the public badly. It’s time he took the lead and drastically cut fuel taxes.