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Decoding the Petrol tax

An infographic, explaining the retail selling price of petrol, was being circulated in the social media by IT cell of BJP. We are living in a world where even Government published data needs scrutiny, so how can a party led information be not scrutinized. So let's get to work.


The infographic shows retail selling price of petrol in Delhi on 16/09/2017 is ₹70.48/ltr and the tax components shared between State and Union as:

Delhi Government               = ₹27.44/ltr
Central Government            = ₹12.46/ltr

This prima facie creating an impression that Delhi enjoys more than double petrol tax compared with Centre.

Firstly, the above claim is having a manifest arithmetical error. Simple addition of State VAT of ₹14.98 with the purported central government share of excise duty ₹9.02 gives only ₹24.00, not ₹27.44 as depicted in the above infographic. This may be an inadvertent error due to oversight.

Next question is whether 42% of Central Excise Duty transferred to State Government or not? Is it an act of goodwill by the Big Brother, i.e., the Centre? Not really, but it's mandated by our Constitution - See article 270, which deals with sharing of the taxes collected by the Union with the States.


Constituent Assembly debates will shed more light to the historical perspective of this article. On 5th August 1949, while discussing this article, Sri. B. Das,Orissa did not mince his words:

“Sir, I do hope the provinces will not be treated as charity boys of the North Block of the Secretariat. Somehow it has happened that people have to come with begging bowls. Whether it is in regard to the Food Commission or the Bengal food problem of 1943, nobody wants charity. We put forth the just demands of the people of India and the Centre, which was an autocratic Government intended to maintain the British Raj in the past should give up that mentality and should part with the legitimate resources to the provinces. I do not ask any further and I do not at present ask anything more.”

Sharing of taxes collected by the Centre with the States is very much part of the federal structure envisaged under the Constitutional scheme. President of India under Art.280 appoints a Finance Commission in every five years. This Commission recommends how the taxes under the ‘divisible pool’ has to be divided among the States. 

The following taxes are coming under the divisible pool:

·      Corporation Tax
·      Income Tax
·      Customs Duty
·      Excise Duty
·      Service Tax

But neither surcharge nor cess collected by the Central Government is part of the divisible pool.

14th Finance Commission Report recommended to share 42% of the taxes belonging to the divisible pool, which is collected by the Centre with the States.
Then, it is evident from the above table that each State is getting a certain percentage share from this total 42%. Hence, adding entire 42% of excise duty to a single State, as shown in the infographic is misleading. For example, Kerala receives 2.5% of this total 42%. 

So under the Federal concept, Centre has to share 42% of the above taxes collected throughout the country with all the States. Let us have a comparison of the share of excise duty component alone (basic excise duties of all items including petrol and diesel) allocated among a couple of States.

State
% of share under Divisible Pool
Amount in Crores
Kerala
2.500%
2486.93
Tamil Nadu
4.023%
4001.97
Karnatka
4.713%
4688.37
Uttar Pradesh
17.959%
17865.14
Madhya Pradesh
7.548%
7508.55
Rajasthan
5.495%
5466.28
Delhi
Nil
Nil

(Source: Receipts Budget, Government of India, 2017-18)

Neither Delhi nor other Union Territories find a place in this table. This is because Art. 270 & Art.280 deals with only sharing of revenue among Union and States. Without either full Statehood or amendment of the above articles, Delhi is not eligible to get a share from this divisible pool. So as far as Delhi is concerned, their income from the petrol tax is limited to VAT alone, ie, ₹14.98.

Let us examine whether Centre shares the entire excise duty of ₹21.48 with the States or not.This ₹21.48/ltr excise duty on petrol consists of three components:

Basic Cenvat Duty                          = ₹8.48/ltr
Additional Excise Duty                  = ₹6.00/ltr
Special Additional Excise Duty     = ₹7.00/ltr

Additional Excise Duty introduced through Finance Act (No.2), 1998, which is known as ‘road cess’. Sub section (4) of Section 111, clearly states this shall not be distributed among the States.

Special Additional Excise Duty introduced through Finance Act, 2002. Sub Section (1) of Section 147 of the Act, explicitly makes it clear that this is for exclusive purpose of the Union and it is a surcharge.

If any further doubts remains, scanning this year’s budget documents will clear the air. Basic and Special Excise Duties excluding Cess on Motor Spirit and High Speed Diesel Oil anticipated is ₹2,40,000 crores and the share kept aside from this excise duty for States wise distribution in the budget is ₹99477 crores (41.5%), matching with the Finance Commission recommendation.

From the receipt budget for 2017-18, it is evident that Central Government also collects the following duties in addition to the above excise duty, but which are not shared with States.

Additional Duty of Excise on Motor Spirit
₹ 22,000 crores

Additional Duty of Excise on High Speed Diesel Oil      
₹ 59,250 crores
Special Additional Duty of Excise on Motor Spirit
₹ 21,300 crores
GRAND TOTAL
₹ 1,02,550 crores

It is now amply clear that the share due to all States from the petrol tax in the divisible pool only consists 42% of the basic excise duty of ₹8.48/ltr, ie, only ₹3.56 and Centre retains ₹17.92, which is amounting to 83.4% of the total excise duty of ₹21.48. Hence, only ₹12.48 shown as the share of Central Government in the infographic is nothing but misleading. 

States are getting only ₹3.56 out of the total exicse duty of ₹21.48, which amounts to 16.6% of the total excise duty on petrol, which is being collected under various heads by the Central Government. This share to the divisible pool is then divided among the States as per the formula of the 14th Finance Commission. As an example, Kerala gets 2.5% of this ₹3.56, ie, only 8.9 paise/litre of petrol, which is being collected by the Central Government.

Then another infographic by the BJP IT Cell mentioned that Kerala and Delhi charges 34% and 27% VAT respectively on Petrol. But they had conveniently ignored the fact that BJP ruled Maharashtra charges 46.52% and Madhya Pradesh charges 38.79% VAT on the same.

To summarise:

  • The narrative that each State Government getting 42% of the Excise Duty collected by the Central Government is not true.
  • Each State gets a share of taxes from the divisible pool based on the percentage share as per 14th Finance Commission.
  • The Union Government only shares 42% of the Basic Excise Duty and not the Additional Excise Duty and Special Additional Excise Duty with the States.

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