At a time when the entire world is struggling to boost economic growth and augment tax collection due to a severe pandemic that has led to enforcement of lockdowns and travel restrictions, India’s case is no different. Since March 24, the country has been in lockdown with economic activity picking up slightly only very recently.
While economic growth is bound to come down, what can also spell trouble is a sharp plunge in tax revenue. Fearing this, the state governments and the centre have taken some stern decisions to shore up revenues in order to maintain financial stability.
Shortly after the government allowed reopening of liquor shops in non-containment zones, some states and Union Territories decided to make the maximum out of this opportunity- Telangana, Delhi and Haryana increased excise on alcoholic beverages by 10-70 percent. This move is going to benefit the states and many of them might be able to make up for the loss of revenues due to Coronavirus lockdown through increased taxes.
States have benefitted prolifically from the hike in excise on liquor and might be able to save their coffers from drying up, and now the centre has also found an opportunity on account of the slump in oil prices. Oil prices have hit a new nadir- a historical low due to the Coronavirus Pandemic, and worldwide lockdowns and travel restrictions.
Demand has dried up drastically and unprecedentedly which led to crude oil prices turning negative last month. Oil prices are thus going to remain low owing to a near-complete shutdown of economic activity in many parts of the world battered by the COVID-19 outbreak.
The Centre wants to capitalise upon the sharp fall in global oil prices that will ultimately lead to cheaper oil imports for India in the future and substantially bring down India’s oil import bill.
Therefore, the Centre has decided to hike excise duties by Rs 10 per litre on petrol and Rs 13 per litre on diesel, and this means a huge incentive for the Centre in terms of augmented tax collection. This duty increase will not lead to fuel price changes for retail consumers. Moody’s Investors Service says that Indian government shall make about $21 Billion if the hike is continued for a whole year.
The increase in excise comes amid crude oil prices still remaining at relatively lower levels of around $30 per barrel, compared to peak level prices. Brent Crude had briefly slipped below $20 per barrel in April and therefore the government has seen this as an opportunity to hike duties on oil. This means that consumers will continue to pay for oil in a similar price range as they did before the lockdown.
Vikas Halan, Senior Vice President for Corporate Finance at Moody’s said, “This reinforces the importance of oil marketing companies to the government and validates the support incorporated in our credit assessment of these companies.”
He added, “The tax hike could result in higher working capital outflow for the oil marketing companies, which will partly offset the working capital savings from lower inventory costs.”
However, the customer doesn’t stand to lose due to increased excise duties as the hike is bound to be set-off completely by a historic fall in crude oil prices. This creates greater fiscal space for the government as it can now push through its lockdown-relief measures with greater assurance, apart from considering higher spending on infrastructure-development activities that can play a massive role in its plans to woo companies that are leaving China due to the ongoing Pandemic.