New Delhi, May 6 The Union government will gain about 1.6 lakh crore in additional revenues this fiscal from record increase in excise duty on petrol and diesel, resulting in total fuel tax 70% of the price.

Late Tuesday evening, the government raised the excise duty on petrol by 10 rupees per liter and the tax on diesel by 13 rupees per liter to mop up gains arising from international oil prices falling to a two-decade low.

The price of petrol has remained unchanged at Rs. 71.26 rupees per liter and diesel at Rs. 69.39, while government oil companies have started raising indirect taxes in exchange for their profits they accrued from fall in international oil prices.

This is the second hike in excise tax in less than two months and will help the government to earn Rs. 1.7 lakh crore in additional revenues per year in consumption from 2019-2020, Industry officials said.

Considering the slump consumption due to travel restrictions imposed by the coronavirus lockdown, the profits of the remaining 11 months of the current fiscal year (April 2020 to March 2021) will be close to Rs 1.6 lakh crore they said.

In addition to Rs. 39,000 crore in the annual revenues generated from March 14 excise duty hike of Rs. 3 per liter each on petrol and diesel, the government stands to gain up to Rs. 2  lakh crore.

After increasing excise duty, taxes - both the central excise and state VAT, account for 70% of the price of petrol and diesel. The cost of a liter of petrol is only 18.28 rupees in Delhi, but after including excise duty (Rs.32.98 rupees), dealer commission (Rs 3.56), and VAT (Rs 16.44), the consumer price is Rs 71.26 per liter.

Likewise, the price of a liter of diesel costs only 18.78 rupees, but after including excise duty  (Rs 31.83), Dealer commission (Rs 2.52), and VAT (Rs 16.26), it is priced at Rs 69.39 for consumers.

State-owned retail fuel distribution companies Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) has frozen petrol and diesel prices since March 16, anticipating government action and now they will realize profits from the continuous fall in world oil prices in the face of rising excise duty.

ICICI Securities said the excise duty would mean a gross auto fuel marketing margin of 64% (Rs 12.1 per liter) from Rs 19 on May 5 to 6.9 rupees on May 6.

Emkay Global said that oil marketing companies (OMC) have continued to apply several increases in VAT rates on petrol and diesel by country, but with gross margins peaking at more than Rs. 18/20 Tuesday, it is likely that the excise hikes will be absorbed.

"The general price freeze has now passed 45 days. OMC officials have said unrealistic global prices are the reason behind this, but looking at the 60% drop in auto fuel consumption", the 6-7x  jump in the marketing margin compared to the normative rate implies more than making up for the volume hit," it said.

Source: BusinessInsider, Free Press Journal

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