Happy with Rs 2.50 cut in petrol, diesel prices? Guess what! Fuel rates can be slashed by another Rs 4.60, Rs 3.30; Here's how

A cut in petrol and diesel prices has been ordered by Modi government today. Fuel rates had rocketted to new highs in recent months on the back of rising global crude oil prices. Consumers can now expect at least Rs 2.50 cut in their petrol and diesel purchases as today Finance Minister Arun Jaitley announced a cut in excise duty by Rs 1.50 while OMCs were expected to absorb another Re 1. Therefore, a total of Rs 2.50 will be cut in both petrol and diesel prices. This would be second cut in excise duty for petrol and diesel prices. 

This move has been welcomed by analysts. Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI said, “We heartily welcome the excise cut on petrol and diesel by Centre and some of the states.”

In the last 6 months (since Mar’18) Petrol and Diesel prices have increased continuously and have even crossed the psychologically crucial mark of Rs 91 in some States. This increase in petrol and diesel prices gives States a windfall gain because of tax on tax approach followed across States.

Ghosh said, “In continuation of our earlier estimates we now estimate that states are getting annualized additional revenue of Rs 25,000 crore in FY19 over and above the budget estimates of states revenue. For 6 months, this figure should thus come to around Rs 13,000 crores. ”

Interestingly, right after when Jaitley announced the excise duty cut today, two major states namely Gujarat and Maharashtra also took one step ahead, by reducing VAT by Rs 2.50 per litre each in petrol and diesel prices. 

Gujarat Chief Minister Vijay Rupani said that the state's oil prices will be cut by Rs 5 per liter.

Rupani tweeted saying, "Finance Minister Arun Jaitley has announced a reduction in fuel prices by 2.50. The Gujarat government also decided to reduce the cost of fuel by 2.50 per cent. As a result, the petrol-diesel 5000 in the state will be cheaper.

Even Maharashtra Chief Minister Devendra Fadnavis tweeted moments later saying, "The Maharashtra government has decided to provide additional relief of 2.5 liters per liter on petrol, which will get five days of relief per liter in the state." 

With this, at least consumers can enjoy Rs 5 per litre cut in petrol and diesel. But guess what! There is still higher potential in trimmind down the price of petrol and diesel especially from states end, and that amount is not Rs 2.5 per litre but in fact much more. 

Following the gains of states, Ghosh also revealed, “We estimate that as the states are getting surplus revenue, they can cut the petrol prices by Rs 4.6 /litre and diesel by Rs 3.30/ litre, without affecting their revenue arithmetic. Hence if the states cut by Rs 2.50, it should be mostly revenue neutral.”

States like Maharashtra, Andhra Pradesh, Madhya Pradesh and Punjab have the highest VAT levied on petrol which is above 35% and in diesel over 23%. In Mumbai, VAT on petrol is at 39.54% and 24.81% on diesel. 

For Petrol and Diesel, taxes considered for computing effective tax rate includes Sales tax ,VAT, Cess,  Additional tax & Surcharge etc. which are recoverable in price as taxes excluding Central levies & CST.

In addition to the above taxes, State Government of Bihar and West Bengal, levies additional tax/surcharge on VAT @ 30%/20% respectively which is irrecoverable in nature.

For Petrol & Diesel, VAT/Sales Tax at applicable rates is also levied on Dealer’s commission in Arunachal Pradesh, Delhi, Gujarat, Haryana, Madhya Pradesh, Punjab, Chandigarh, Puducherry, Andaman & Nikobar, Meghalaya , Dadar Nagar Haveli and Daman & Diu.

By end of FY17, the states earned about Rs 166,378 crore through VAT on petrol and diesel. On yearly, basis, revenue from VAT was up by 16.47% from Rs 142,848 crore in the same period. Such would be 28.93% increase in VAT revenue from Rs 129,045 crore recorded in FY14. 

If we look at SBI’s comment for potential Rs 4.60 and Rs 3.30 per litre in cut in petrol and diesel. While if we add up, the government’s latest announcement of about Rs 2.5 cut in fuel prices. In a major good news, India’s petrol and diesel prices can be actually be brought down by Rs 7.1 and Rs 5.80. 

Earlier today, a litre of petrol was priced at Rs 84 in New Delhi, at Rs 85.80 in Kolkata, at Rs 91.35 in Mumbai and Rs 87.33 in Chennai. Whereas, a litre of diesel was available at Rs 75.45 in New Delhi, at Rs 77.30 in Kolkata, at Rs 80.10 in Mumbai and Rs 79.79 in Chennai.