Here’s how taxes on fuel has impacted the Indian economy

Fuel is taxed both by central government and state governments with impunity to satiate their never ending need of revenues.

Andhra Pradesh, Delhi and Maharashtra have increased VAT on diesel and petrol to mop up more revenues. Centre also increased excise with impunity in recent past.

Sudden drop in crude prices had raised expectations of consumers that retail prices of transport fuel will decrease but the Centre and the states slapped additional taxes only.

Indian economy was severely impacted due to rise in global crude oil prices in last seven to eight years.

Taxes on oil had always been an easy and assured source of revenue. Though initially prices were kept high to promote efficient use of fuel oils, with time high taxes became major component of government revenue and then dependence.

Off late, oil prices have crashed but retail prices are way above than import prices.

It is important to recognize the fact that whenever global crude prices rise, it affects all the countries uniformly but high incidence of tax on energy is self inflicted injury.

While global energy prices are beyond anybody’s control, high tax on fuels is country’s prerogative. High taxes increase the cost of energy and inflate prices of all the commodities, which fuels inflation because taxes on energy are taxed several times before goods are ready for end consumers. It calls for more revenue and thus need for more taxes. It is a vicious circle.

Clue can be taken from the US’ economy. Perhaps, US is the only country which has recognized the fact that high cost of energy is inflationary and therefore energy is least taxed.

Among 20 OECD nations, the US is least taxed nations on energy. This also helped them being competitive worldwide. Over the years, US economy has grown manifold. Surplus generated over decades have put US ahead of many countries and US dollar is one of the strongest currencies worldwide.

It is also pertinent to mention that petrol and Aviation Turbine Fuel (ATF) are treated as luxury fuels and taxed with contempt. One of the studies says that petrol is used by end consumers hence its price is not inflationary. This is a wrong premise. High prices of petrol and ATF are as inflationary as diesel prices.

Similarly, ATF is also viewed as a rich man’s fuel and taxed with impunity especially by the states. Diesel price was seen as inflationary and was subsidized in the past but high state taxes brought no relief to consumers or economy.

It is necessary that Centre as well as states realize that high taxes on fuels are highly inflationary and detrimental to economy.

All along during GST discussions, states have successfully convinced Centre to exclude fuel oils from including into GST or else states would lose their major source of revenue. The issue needs to be debated extensively and then only solution may emerge in due course of time.

The possible solution is to reduce taxes on fuel oils gradually and increase excise or service tax on other goods to compensate loss of revenue on account of lower tax on fuels and declare fuels as notified commodity till such time GST is through. Once GST is through, bring transport fuels under GST.

High taxes on energy have cascading impact on prices. It’s a major component of prices of goods and services. It’s a single major cause of inflation. If taxes on fuels are reduced, expenditure of both government and corporate will come down. Essential commodities will become cheaper. Overall economy will deflate and inflation will be checked. Indian goods will become more competitive in the world market and exports will grow. Cheaper fuels shall have tremendous positive impact on Indian Economy.

(The article is authored by Sameer Garg. You can reach out to him at samg1960@gmail.com)

(Image: Indiatimes)