Full burden of fuel duty cut on Centre: Finance Minister Nirmala Sitharaman

Finance minister Nirmala Sitharaman on Sunday said that “the entire burden” of the last two instances of “excise” cuts on auto fuels – in November last year and on Saturday – will be borne by the Centre. In a series of tweets, she explained that this was because the shareable part of these taxes, namely the basic excise duty (BED), was not cut on both occasions.

The Centre’s taxes on petrol and diesel include BED, special additional excise duty, road & infrastructure cess, and agriculture & infrastructure development cess. Of these, only BED is part of the divisible pool of taxes, and hence needs to be shared with states as per the Finance Commission formula, under which states’ share in the pool is 42%.

But it may be noted that since states’ taxes are mostly ad valorem and levied on the base, including the Centre’s taxes (all volume-based), the Centre’s tax cut has a direct impact on states’ revenues. For example, as a result of Saturday’s excise cut, Kerala will lose Rs 2.41/litre on petrol and Rs 1.36/litre diesel, while Rajasthan will lose Rs 2.48/litre on petrol and Rs 1.16/litre on diesel.

Also, when the Centre hiked excise steeply in 2020, only the non-shareable part of the taxes went up.

While as much as 25% of the Central taxes on diesel was shared with the states under the relevant formula as on October 30, 2018, the states’ share in the central taxes on auto fuels was just 3.4% on November 5, 2021. It has risen to 4.7% after the latest excise duty cut.

“The duty reduction made yesterday has an implication of Rs 1,00,000 crore a year for the Centre. The duty reduction made in November ’21 has an implication of Rs 1,20,000 cr a year for Centre. Total revenue implication to Centre, on these two duty cuts is thus ₹ 2,20,000 cr a year,” Sitharaman tweeted.