How Centre spruced up its fiscal position at states’ cost

Centre may now earn 30% more tax than all states combined, from being 20% behind them five years ago

The Centre is battening on the states by tilting in its favour the formula for sharing petroleum revenues with them.

Consumers are paying an exorbitant 180 per cent tax on petrol and 140 per cent on diesel in Delhi and in most other cities in India.

Little wonder then that the Central government expects a huge ~3.46 trillion by levying excise duties on the retail sales of the two fuels this year, and ~3.2 trillion in 2021-22.

States would generally have had reasons to cheer because they command a 41 per cent share in the Centre’s tax revenues.

But the Centre has raised the cess component in excise duties and their proceeds are not shareable with the states.

This isn’t new. The Centre has been raising the cess on fuels for long. For most of 2016-17, some 56 per cent of excise duty on petrol was levied as cess. Less than half the fuel revenues went to the kitty shared with the states.

But what’s new this time is that only 9 per cent of excise taxes you pay the Centre goes into that kitty, and it will further fall to 4 per cent next year, according to a Business Standard analysis. In other words, the Centre now keeps 96 per cent of the tax on petrol solely for itself.

Applying the share of the cess in taxes in a financial year, and adjusting for the weighted average of diesel and petrol consumption in India, a simple calculation shows that the states may get a meagre ~14,000 crore of the ~3.46 trillion the Centre expects from fuel taxes. They would have received nearly ~70,000 crore had the cess been kept at 2017 levels, according to BS calculations.

In 2021-22, the states may get close to ~7,000 crore from the ~3.2 trillion the Centre expects to rack up from the tax.

There is thus a compelling case that the Centre has bolstered a sizeable part of its receipts and expenditure at the cost of the states’ share of fuel revenues. States earn well from sales tax on fuels, and also get part of the Centre’s fuel revenues from the Central Road and Infrastructure Fund, where the cess proceeds go.

But the scale at which the Centre has raised the cess is likely to result in it earning 30 per cent more revenue than all states put together, even after including their own revenues from value-added tax, according to Business Standard calculations. From earning 20 per cent less than the states five years ago, the Centre has come a long way in stamping its claim on fuel taxes it collects, using the cess mechanism.

“Cess and surcharges earmarked by the Union Government have grown over time,” the report of the 15th Finance Commission has noted. They would form as high as 24 per cent of gross tax revenue this year, up from 20 per cent last year.

“Given international trends, there is a compelling case for raising India’s tax ratio from both macroeconomic and redistributive perspectives, especially at the sub-national level,” the 15th FC report said, suggesting that taxation should be more balanced.

A cess is a tax levied for a specific purpose, unlike any other tax which is generally not tied to a particular spending head.

The 15th FC has recommended that the states get 41 per cent of the Centre’s tax revenues.

A comparison bears out how the Centre has enriched itself.

THEN: As much as ~21.48 was collected as excise duty on a litre of petrol in April 2017. Of this, ~9.48 was collected as basic excise duty (BED). This portion went to the pool shared among the Centre and the states. The rest, which was the cess portion, was levied in two parts: Additional excise duty (AED) of ~6 per litre and special additional excise duty (SAED) also of ~6, totalling ~12 per litre. About 42 per cent of the shareable portion, or ~4, went to the states, giving the Centre ~17.5 per litre of petrol a consumer bought.

NOW: Of the ~32.9 collected as tax on a litre of petrol today, only ~1.4 is collected as basic excise duty (BED), while a staggering ~31.5 is levied as cess, including the newly introduced Agriculture Infrastructure and Development Cess, none of which is shared with the states, which get a paltry 60 paise.

States’ VAT component used to balance this cess-induced imbalance to some extent. Until 2014-15, when oil prices reigned high, states made hay from fuel taxes, by earning 37 per cent more than the Centre. Centre raised cess as well as the shareable tax in subsequent years, and states raised VAT rates too, and both came at a parity level, each earning close to ~2 trillion in 2019-20.