Govt cuts fuel prices Rs 2.50 per litre, BJP-run states lower VAT

New Delhi: The Centre on Thursday cut the prices of petrol and diesel by Rs 2.50 per litre to give relief to the common man as international oil prices were hovering at over a four-year high. The move includes an excise duty cut of Rs 1.50 per litre by the Centre and the oil marketing companies absorbing another Rs 1 per litre.

The Centre’s decision to cut fuel prices comes just days before the Election Commission is expected to announce the dates for Assembly elections in the crucial states of Rajasthan, Chhattisgarh, Madhya Pradesh and Telangana.

After the Centre’s announcement, BJP president Amit Shah said he had spoken to all BJP chief ministers and they too had decided to cut VAT by Rs 2.50 per litre, so that petrol and diesel prices in their states are reduced by an overall Rs 5 per litre.

Within hours, the BJP-ruled states of Maharashtra, Gujarat, Assam, Madhya Pradesh, Uttar Pradesh, Tripura, Himachal Pradesh, Chhattisgarh, Jharkhand and Uttarakhand, among others, announced a Rs 2.5 per litre cut in VAT on petrol and diesel prices. Jammu and Kashmir, now under Governor’s Rule, slashed VAT by Rs 2.50 per litre on both fuels.

The Centre also challenged all non-BJP-ruled states  “whose leaders were only tweeting and indulging in lip sympathy” to also cut VAT on both fuels so that the consumer gets a bigger relief.

However, the Opposition-ruled states remained non-committal on reducing excise duty. Karnataka and Kerala indicated they would not be reducing local duties on fuel. Kerala finance minister T.M. Thomas Isaac said it would adversely affect the state’s revenue.

West Bengal CM Mamata Banerjee and Delhi CM Arvind Kejriwal demanded that the Centre should cut excise duty by Rs 10 per litre on petrol and diesel. West Bengal, Karnataka, Rajasthan and Andhra Pradesh had recently themselves cut VAT on fuels.

Union finance minister Arun Jaitley said the cut in fuel prices was “good economics as it will increase the purchasing power of consumers without hitting the fiscal deficit target”. He added: “And reducing oil prices, if you say is good politics, so be it.”

The Centre will issue a notification on the cut in excise duty by Thursday midnight so that consumers can get immediate relief.

The finance minister asked all state governments to match the move with a similar reduction in sales tax or VAT and said it would be a “test” for those states whose leaders were only tweeting and indulging in lip sympathy. “What will they do now — and last time too only BJP and NDA-led state governments reduced VAT. This time if other state governments do not do

it, then people will ask them,” he said. Mr Jaitley said since state taxes on petrol and diesel were on an ad valorem basis, they will only have to forego the extra revenue which came after oil prices had started rising.

SBI group chief economic adviser Soumya Kanti Ghosh said the Rs 2.50 per litre cut in fuel prices by states was revenue neutral. He said on an average, states can cut diesel prices by Rs 3.30 per litre and petrol by Rs 4.60 per litre.

Mr Jaitley said the impact of the cut in excise duty will be Rs 10,500 crores in taxes and that it will be mere 0.05 per cent of the fiscal deficit. The finance minister said despite the cut in excise duty, he was confident of achieving the fiscal deficit target of 3.3 per cent of GDP for 2018-19 due to the increase in the tax base.  

For state-owned oil companies absorbing Rs 1 per litre price would mean a Rs 10,700-crore dent in revenue on an annualised basis.

The Centre’s decision to ask public sector companies to absorb a part of the burden of petrol and diesel price rise had raised a question mark over the policy of deregulation in fuel pricing. If oil prices continue to rise, it will test the government’s resolve to carry on with the deregulation of fuel prices. Mr Jaitley claimed that the government was not going back on deregulation. “We’re not going back on deregulation because oil marketing companies will still continue to factor prices  (international crude prices) on a daily basis,” said the finance minister. Also, a senior government official said unlike in the UPA period when oil prices were regulated, the oil companies this time will not be compensated by the Centre. Mr Jaitley said right now the oil companies were in a much stronger financial situation and added that they would adjust it over present and future prices.

India Ratings and Research chief economist Devendra Kumar Pant said the Centre’s move to reduce fuel prices would cool off retail inflation by 0.09 per cent. “A matching cut in VAT by state governments would result in retail inflation declining by 0.16 per cent,” he said.

Brent, the benchmark for half the world’s oil, has touched $86 per barrel mark, the highest in four years.

The Centre had raised excise duty on petrol by Rs 11.77 per litre and on diesel by Rs 13.47 per litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell, but then cut the tax just once in October last year by Rs 2 per litre. Since mid-August, petrol prices have risen by Rs 6.86 per litre and diesel by Rs 6.73 per litre — the most in any six-week duration after the daily revision of prices was introduced in mid-June last year.