Though not affecting end-consumers, the income of states from excise duty on the auto fuels will be significantly impacted, as the adjustment to accommodate the new cess will be done by slashing the basic excise duty rates by 53% for petrol and 63% for diesel. Since cess and surcharges are not sharable with states, the states get 42% of the auto-fuel excise duty income only from the basic excise duty component. Of course, the states levy their own VAT on petrol and diesel, which goes exclusively to the state coffers, but current high prices limit the scope of increasing VAT further.
The agricultural cess has been proposed to earmark the resources “to improve agricultural infrastructure so that we produce more, while also conserving and processing agricultural output efficiently,” Sitharaman stated. To offset the effect of the new cess, the basic excise duty and the special additional excise duty (surcharge) rates will be reduced accordingly. The Centre’s tax on diesel (basic excise, surcharge and road/infra cess) is currently `31.83/litre, and the total levy after the addition of the agricultural cess will be the same. The divisible portion of the tax pool — basic excise duty — had remained stagnant at `4.83 (diesel) and `2.98 (petrol) since February, 2018.
The Centre’s tax revenue from petrol and diesel, pre-devolution to the states, stands at `1.31 lakh crore in first half of FY21, up a whopping 40.4%, even though the sales of the two auto fuels have cumulatively dipped 24.2% annually in the same period. On the other hand, the states’ tax revenue from VAT on the fuels have fallen 17.6% to `78,164 crore. In March, 2020, the surcharge on auto fuels was increased by `2/litre and road cess was raised by `1/litre. Subsequently in May, 2020, road cess on petrol and diesel was increased again by `8/litre, while the surcharge was hiked by `2/litre for petrol and `5/litre for diesel.