CHENNAI: While the government’s tight fiscal position and high dependence of fuel taxes have resulted in the continued levy of substantial taxes imposed during the onset of the pandemic last year, ratings agency ICRA said that if fuel consumption growth comes in as expected this fiscal, the government could get room to slash fuel cesses by Rs 4.5 per litre.
The agency noted that the estimated growth in consumption would result in Rs 40,000 crore of extra cess collections during the current fiscal (FY22) compared to the previous one—additional that the government could choose to forego by making cess reductions.
According to the agency’s estimates, petrol consumption is estimated to grow 14 per cent and diesel 10 per cent year-on-year in FY22 driven by recovering economic activities and mobility. “Higher consumption of fuels should support a rise in the indirect taxes levied on them, affording a window for a partial reversal in the cess hikes that were imposed last year,” ICRA Chief Economist Aditi Nayar said, adding that cesses levied on petrol and diesel could be reduced by Rs 4.5 per litre while still maintaining the level of cess collection of fuels recorded last fiscal year.
“Such a cut in the cess rates would offer some relief to household budgets and ease the inflationary pressures related to the rising global crude oil prices,” Nayar said. Petrol prices have breached over Rs 100 per litre in many states across the country, while diesel is approaching the three-digit mark in high VAT states. ICRA says that high fuel prices have played a part in retail inflation breaching the RBI’s target band in May this year. CPI inflation had rise ln to 6.3 per cent during the month, exceeding the upper threshold of the RBI’s Monetary Policy Committee’s (MPC) medium term target of 2-6 per cent.
A cut of Rs 4.5 per litre can help in reducing the headline inflation by 0.10 per cent, it noted. “A reduction in fuel prices generated by a cut in the cesses imposed, would help dampen the inflationary pressures, and prevent inflationary expectations from getting entrenched at a higher level, thereby affording monetary policy continued space to support a revival in growth,” Nayar said. The Union government is estimated to have collected Rs 3.2 lakh crore in revenue from the cesses in 2020-21, set to grow to Rs 3.6 lakh crore due to higher consumption.