The Government late on Wednesday finally bit the bullet on runaway fuel prices and slashed excise duties on petrol and diesel by ₹5 and ₹10 per litre, respectively, citing the need to help farmers for the rabi crop, ease inflation and give the economy a consumption boost.

While pump level prices are expected to cool off effective Thursday, the Centre has also urged States to ‘commensurately reduce’ the Value Added Tax (VAT) on petrol and diesel to give relief to consumers. However, the actual amount of the State VAT levied on fuels is expected to reduce immediately as well, because States levy varying tax rates on an ad-valorem basis, or simply put, as a percentage of the fuel price after central excise duties are levied.

The Centre had been levying excise duties and cess amounting to ₹32.90 per litre on petrol and ₹31.80 per litre on diesel. For context, the central excise duty on diesel was ₹3.56 per litre in 2014.

The Reserve Bank of India has been mooting fuel tax cuts since February this year in a bid to cool down persistently high inflation and Finance Minister Nirmala Sitharaman had defended the high taxation saying there is no assurance that States would cut duties if the Centre did so and called for a co-ordinated approach.

On Wednesday, the Finance Ministry said the reduction in excise duty on petrol and diesel ‘on the eve of Deepavali’ would boost consumption and keep inflation low, helping the poor and middle classes.

With petrol and diesel prices scaling record highs every other day, the government had recently blamed the need to service oil bonds issued by the UPA Government to rein in high prices during its tenure. In the past few weeks, it has also argued that the petroleum taxes are helping fund the COVID-19 vaccination drive and other welfare measures.

Crude prices

“In recent months, crude oil prices have witnessed a global upsurge. Consequently, domestic prices of petrol and diesel had increased in recent weeks exerting inflationary pressure. The world has also seen shortages and increased prices of all forms of energy,” the Ministry said in a statement.

The average crude oil price for the Indian basket of consumption had hardened to an average of $82.11 a barrel in October, and global financial major Goldman Sachs expects Brent crude oil prices to harden from $83.72 a barrel on Wednesday to $110 a barrel.

“This reduction will not only reduce the fuel prices directly for the consumers but also assist in reduction of costs through the supply chain, on costs of inputs and logistics, for instance, as the excise duty is a non creditable cost for businesses too,” said Mahesh Jaising, partner at Deloitte India, referring to petroleum products being out of the GST net.

At the last GST Council meeting in September, the Government had taken note of a Kerala High Court order asking for the inclusion of petroleum products under the GST net to be considered. However, the Council had reached a consensus that this was not the appropriate time to do so.

Emphasising that the excise duty on diesel has been lowered by twice the amount as petrol, the Finance Ministry said this would particularly help farmers in the upcoming rabi season. “The Indian farmers have, through their hard work, kept the economic growth momentum going even during the lockdown phase…,” it noted.