Oil bonds

Explained: Why the Govt is Misleading Us on High Fuel Prices and Oil Bonds

The reason why doesn’t matter. The only thing that matters is controlling the narrative – Fabian Nicieza in Suburban Dicks.

Over the last few years, several government ministers have blamed the oil bonds issued during the era of the previous United Progressive Alliance (UPA) government, for the high petrol and diesel prices, which have prevailed for a while now.

The then oil minister Dharmendra Pradhan had tweeted in 2018 that: “The country and our OMCs [oil marketing companies} are also yet to recover from the shock of Oil Bonds worth Rs 1.4 Lakh Crores issued during the UPA regime.”

The finance minister Nirmala Sitharaman rblamed the oil bonds for the high prices of petrol and diesel, in a recent statement.  This is not true. I have explained this issue in great detail on earlier occasions. Nevertheless, I will try and offer a broader summary here, before getting on to the new points I want to make. 

Oil bonds were largely issued by the previous UPA government. This was done in order to compensate oil marketing companies, like Indian Oil, Bharat Petroleum and Hindustan Petroleum, for selling petrol, diesel, kerosene and domestic cooking gas, at a price which wasn’t monetarily feasible for them.

The argument offered by the National Democratic Alliance (NDA) government is that since interest has to be paid on these bonds and that these bonds have to be repaid, the government needs to charge a high excise duty on petrol and diesel. This leads to high petrol and diesel prices.

In that sense, the NDA government and you and me are paying for the sins of the UPA government. This argument is never made in as clear words as I am making it here. Things are left vague enough for people to fill in the gaps and make their own WhatsApp forwards.

As of March 2014, before the NDA government came to power, the total oil bonds outstanding stood at Rs 1,34,423 crore. By March 2015, this had come down to Rs 1,30,923 crore, which is where it has stayed up until March 2021.

This means that between end March 2015 and end March 2021, no oil bonds matured and hence, the NDA government didn’t need to repay a single rupee of oil bonds. Of course, interest had to be paid on these bonds. An interest of Rs 9,990 crore has to be paid on these bonds every year. This means, over a period of six years, between end March 2015 and end March 2021, the government has paid Rs 59,940 crore as interest on these bonds.

During the same period, it earned Rs 14,60,036 crore as excise duty on petroleum products. As the government told the Lok Sabha in early August this year: “Central excise duty is contributed largely by Petrol and Diesel.” So, excise duty earned on the sale of petrol and diesel makes up for a bulk of the excise duty earned on sale of petroleum products.

In total, during this period, 4.1% of the excise duty collected on petroleum products has gone towards paying interest on oil bonds. In 2020-21, this stood at just 2.7% (Rs 9,990 crore of interest against excise duty of Rs 3,71,726 crore earned on petroleum products).

In fact, if were to look at excise duty collected on just petrol and diesel, between end March 2015 and end March 2021, it amounts to around Rs 13.7 lakh crore. The interest paid on oil bonds amounts to 4.4% of this amount.

In 2021-22, the current financial year, Rs 10,000 crore worth of oil bonds are maturing and hence, need to be repaid. The interest that needs to be paid on the oil bonds during the year should amount to around Rs 9,500 crore. So, during 2020-21, around Rs 19,500 crore will be needed by the government to service these bonds.

In an answer provided to the Lok Sabha recently, the government had said that the total excise duty earned on petrol and diesel, between April and June this year, had stood at Rs 94,181 crore.

Given that, the second Covid wave was on during this period, and that it would have negatively impacted the consumption of petrol and diesel to some extent, it is safe to say that if excise duty on petrol and diesel continue to be where they are, the total collections this year can easily touch Rs 4 lakh crore. Of course, the collections on petroleum products will be even greater.

Rs 19,500 crore works to around 4.9% of Rs 4 lakh crore. So, the government is likely to spend one-twentieth of the excise duty earned on petrol and diesel, in servicing the oil bonds (both repaying maturing bonds and paying interest on the outstanding bonds).

The remaining bonds worth Rs 1,20,923 crore (Rs 1,30,923 crore minus Rs 10,000 crore worth of bonds maturing this year), will mature between November 2023 and March 2026.

The other argument that is being made is that the government needs to save money in order to repay these bonds in the years to come. It is worth clarifying here that the government meets the expenditure of a given year from the revenue earned during that year. Hence, bonds maturing in 2023, 2024, 2025 and 2026, will be repaid using taxes earned during that year. This nullifies the argument about the government having to save in order to repay these bonds.

Hence, the entire argument that the oil bonds have led to a situation where the government has had to charge a high excise duty on petrol and diesel, is totally wrong. In fact, as I have explained earlier, the reason for this lies in the fall of corporate tax collections.

In 2018-19, the total corporate tax or the income tax paid by corporates had stood at Rs 6.64 lakh crore. This fell to Rs 5.57 lakh crore in 2019-20. It fell further to Rs 4.57 lakh crore in 2020-21.

This fall was on account of the base rate of corporate tax being cut from 30% to 22% in September 2019. It can also be argued that Covid must have led to lower profits for corporates in 2020-21 and hence, lower corporate tax collections for the government.  

Data from the Centre for Monitoring Indian Economy tells us that in 2020-21, the net profit of listed corporates (more than 5,000 companies) increased by 120.3% in comparison to 2019-20. So, Covid didn’t impact profits among the listed corporates. While net profit went up by 120.3%, the corporate tax paid by these companies went up just 13.9%. 

Covid has negatively impacted smaller businesses and that must have impacted corporate tax collections to a certain extent. But a bulk of the fall in corporate tax collections seems to have come from a lower rate of tax. This has been compensated through higher excise duty on petrol and diesel.

In 2018-19, excise duty earned on petroleum products by the central government brought in Rs 2.14 lakh crore. This jumped to Rs 3.72 lakh crore in 2020-21, thanks to a higher excise duty on petrol and diesel.

The corporate tax cut was supposed to boost consumption and lead to an increase in corporate investment. But that hasn’t really happened. Expecting consumption to increase thanks to lower corporate taxes was kite-flying at its very best.

Consumption increases when people see the prospect of earning more money, not when corporate taxes go down. Investment, for a whole host of reasons, has been down in the dumps for close to a decade now,. I shall not go into these reasons in detail here, having dealt with this issue on multiple occasions in the past.

This has created a communication problem around high petrol and diesel prices for a government obsessed with managing the narrative.

In their book Nudge—The Final Edition, Richard Thaler and Cass Sunstein talk about the publicity principle, originally elucidated by the philosopher John Rawls. As Thaler and Sunstein write: “If a firm or government adopts a policy that it could not easily defend publicly, it stands to face considerable embarrassment, and perhaps much worse, if the policy and its grounds are disclosed [emphasis added].”

This is precisely the problem with the entire messaging around the issue of high petrol and diesel prices. The only reason for this is the high excise duty on petrol and diesel, in order to compensate for lower corporate tax collections.

The excise duty on petrol has gone up from Rs 9.48 per litre in October 2014 to Rs 32.90 per litre currently, a jump of close to 250%. A bulk of this increase of around Rs 10 per litre has happened in the last one year. A similar story has played out with diesel, with excise duty going up from Rs 3.56 per litre in October 2014 to Rs 31.80 per litre currently, a jump of close to 800%. (I would like to thank Chintan Patel for providing this information by using the central government notifications on excise duty on petrol and diesel).

Of course, this is not something that a narrative obsessed government can admit to. This would mean telling the world at large that the common man is being made to pay for lower corporate taxes. This has led to the entire narrative around oil bonds and they having to be repaid and interest having to be paid on them, and that leading to a higher excise duty on petrol and diesel, and hence, higher pump prices of fuel.

This is a narrative that can be easily sold on WhatsApp, given that most people don’t have the time to check the facts of any argument and buy anything that is sent to them over the world’s newest and the most happening university.

As Thomas Sowell writes in Knowledge and Decisions: 

“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”

This is something that the current government is making use of and projecting a narrative that wrongly blames the past government for high fuel prices.

As Thaler and Sunstein write: “Organizations of all forms should respect people, and if they adopt policies that they could not and would not defend in public, they fail to show that respect. Instead, they treat citizens as tools for their own use or manipulation [emphasis added].”

This is precisely what is happening.

The interesting thing is that the government has given the more or less the right reason behind high fuel prices in an answer to a question raised in the Lok Sabha. As it said: “The excise duty rates on petroleum products are calibrated from time to time with the objective of generating resources for infrastructure and other developmental items of expenditure, taking into account all relevant factors and keeping in view the prevailing fiscal situation.”

Every government has the right to tax the citizens in different ways. This answer tells us precisely that. Of course, explaining the rationale behind the tax is not always that straightforward.

On WhatsApp University

Around fifteen days back, a friend of mine from school asked, whether repayment of oil bonds issued during the Congress-UPA regime was responsible for higher petrol and diesel prices. Given that, these bonds had to be repaid, the government had no option, but to charge higher taxes on petrol and diesel.

I said no. He then asked, why are forwards going around on WhatsApp saying so. I wrote a piece explaining why there was no link between repayment of oil bonds and the high prices of petrol and diesel.

This set me thinking and led to the question. Why do people believe things sent on WhatsApp so easily? And here are a few answers that I could come up with.

1) Social media, cyberspace, WhatsApp or whatever else one might want to call it, in a way is an extension of the old village square or simply the park in the housing complex you live in or the little space in front of your building, where you meet your neighbours and friends, and talk and gossip with them. Like was the case earlier, WhatsApp is also a space where people meet, talk, discuss and have views on things they don’t understand, like was and is the case, when they meet physically.

The discussions that happened (or still happen) in a village square kind of space were not recorded anywhere. A version of the discussion existed only in the minds of people who happened to be there. No one remembers their past exactly. We all remember a version of it. And as days went by people forgot about what they had discussed at the village square and moved on.

This is not true about WhatsApp or other forms of social media. If a wrong explanation about a particular issue is offered there is an evidence that it exists. Of course, unlike a village square or a park in the housing complex, WhatsApp is not a physical space. But it is still a space where people meet and interact. So, to that extent things haven’t really changed.

Hence, what was happening earlier is also happening now. Even in the pre-WhatsApp/social media era, people believed in conspiracy theories or offered explanations on topics they had very little idea of and believed in many things without doing some basic research. It’s just that there was no record of such things happening.

But in a digital space, some sort of record of the discussion having happened, remains. Hence, this phenomenon is more obvious now than it was in the past. And to that extent, the fact that most people in general are ignorant about most things, comes out much more clearly now. Of course, their ignorance continues to be directly proportional to their confidence.

2) When I use the word ignorant here, I am not being judgmental, I am only trying to state the obvious. Most of us have extremely limited expertise in extremely limited areas (I suggest that you read another piece titled On Advice that I wrote a while back).

This is primarily because most of us are busy in our own little worlds, trying to make the best of what we have. So, unless something really matters to us, we don’t want to spend time understanding it. This explains why people spend so much time planning holidays but have next to no idea about what the gross domestic product (GDP) of a country really means.

As Thomas Sowell writes in Knowledge and Decisions: 

“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”

Nevertheless, this doesn’t stop us from having views on things that we don’t understand.

This is a weakness, which people with an agenda make use of. Take the case of the high petrol and diesel prices. They are high primarily because corporate tax collections have fallen since September 2019, when the government decided to cut the peak corporate rate from 30% to 22%. In order to make up for this deficit, the central government is charging higher taxes on every litre of petrol and diesel sold, than they did in the past.

This is a politically suicidal explanation when it comes to explaining why petrol prices in many parts of the country have crossed Rs 100 per litre. How can the common man pay more, when the corporates are not paying their fair share of taxes?

Hence, the politicians and many others have come with the story of oil bonds issued by the previous government having to be repaid, as an explanation for high petrol and diesel prices. Of course, a basic Google search can negate this explanation. But once people have read this on WhatsApp their minds are satiated, as an anomaly has been explained away in a way that sounds reasonably true.

Given the fact that people are learning what they are from WhatsApp, it’s even referred to as WhatsApp University in zest. 

3) The question is, why all this possible now, and wasn’t possible earlier. The answer lies in the fact that in the earlier era any large propaganda had to be carried out openly either through newspapers, magazines, TV or radio, for that matter. And given that it came with its own set of limitations.

One, there was a price attached to it. Two, most propaganda came with a face.

So, let’s say petrol prices had crossed Rs 100 per litre in the early 2000s, when smart phones were not around. Anyone writing a piece in a newspaper offering a reason for it, had to do it in his own name. In that situation, it would be very difficult to offer the wrong reasons in the hope of people buying it and the writer getting away with it. Once a piece had been published, others could easily call out the writer’s bluff leaving his or her reputation in tatters.

In today’s era, with a significant proportion of the population owning smartphones and the availability of cheap internet leading to the rise of social media like WhatsApp, such problems no longer exist. Producing fake news is cheap. All it requires is a literate person, who has a mobile phone with an internet connection. This has made things significantly easy for people who want to spread propaganda or run an agenda or just want to have some fun.

Take the case of vaccine deniers. Social media has made their life very easy. They can propagate any nonsense that they want to. This is not to say that this did not happen earlier. It did. It’s just that now it can be done anonymously and probably at a much faster pace. Anyone can author a post and just send it across. And after it has been forwarded a few times, no one has any idea of who has written it. The anonymity that the social media provides is a big reason why fake news is created in the first place.  

4) Also, given that the social media is more or less free, it comes with the capacity of endless repetition. This is what political parties all over the world try to make use of, by feeding content that their supporters like to believe in and creating hatred towards a class or a community or a caste or a religion.

Or simply offering nonsensical reasons for an economic trend like petrol and diesel prices are high because oil bonds need to be repaid. As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times: “The problem with echo chambers is not just that we are only exposed to ideas we like; we are also exposed to them again and again and again, endlessly.” So, every time petrol and diesel prices rise, the oil bond angle is whipped out all over again, because there is no cost attached to it. Also, as Sowell writes: “sober analysis seldom has the appeal of ringing rhetoric.”

In fact, the production of fake news is impacting the traditional mainstream media which wants to do good journalism. As Banerjee and Duflo write: 

“Circulation of news on social media is killing the production of reliable news and analysis. Producing fake news is of course very cheap and very rewarding economically since, unconstrained by reality, it is easy to serve to your readership exactly what they want to read. But if you don’t want to make things up, you can also just copy it from elsewhere.”

The larger point here, as Banerjee and Duflo put it, is ‘the economic model that sustained journalism as a location for “public space” (and correct information) is collapsing’. In this scenario, ‘without access to proper facts, it is easier to indulge in nonsense’.

Of course, this is not to say that the mainstream media is all kosher. It is not. But that is another topic for another day.

5) The major issue at play here is, whether you support the current government or not. This has led to a situation where there is a great need among many people to support the government on everything and anything. What George Orwell called groupthink is at work here.

As Christopher Booker writes in Groupthink—A Study in Self Delusion: “A group of people comes to be fixated on some belief or view of the world which seems hugely important to them.” In this case, the view is that the current Narendra Modi government can do no wrong. Hence, if petrol prices are more than Rs 100 per litre in many parts of the country and diesel prices are very high, there must be a genuine reason for it, for which the current government is not responsible.

And this is where the fake story of oil bonds comes in and satiates the minds of such individuals. Social media like WhatsApp just helps achieve this at a fast pace and an almost costless sort of way.

Also, once such people have a reason, they go out of their way to defend it. As Booker writes: “They are convinced that their opinion is so self-evidently right that no sensible person could disagree with it. Most telling of all, this leads them to treat all those who differ from their beliefs with a peculiar kind of contemptuous hostility.”

This explains why many family WhatsApp groups where people used to share good morning and happy birthday messages, have turned into virtual battlefields. But the trouble is, such individuals are not doing their own thinking. They are just believing in whatever they have been told.

As Booker writes: 

“They have not looked seriously at the facts or the evidence. They have simply taken their opinions or beliefs on trust, ready-made, from others. But the very fact that their opinions are not based on any real understanding of why they believe what they do only allows them to believe even more insistently and intolerantly that their views are right.”

They have become victims of groupthink and are likely to continue to be so.

To conclude, as Alan Rusbridger, writes in Breaking News – The Remaking of Journalism and Why It Matters Now: “ Bad information [is] everywhere: good information [is] increasingly for smaller elites. It [is] harder for good information to compete on equal terms with bad.”

Bad news is driving out good news. And WhatsApp, as a medium, is at the heart of it. 

Petrol and Diesel Prices are High Due to Lower Corporate Taxes, Not Because of Oil Bonds

Life is what happens between WhatsApp forwards.

Yesterday evening, a friend from school WhatsApped a doubt he had. He wanted to know if petrol and diesel prices were high because the Narendra Modi government had to repay oil bonds, which had been issued by United Progressive Alliance (UPA) government more than a decade back.

To repay these oil bonds, money is needed. This has led to significantly higher central government taxes on petrol and diesel, which has in turn led to higher pump prices.

However convincing the argument may sound, it’s wrong. 100% wrong. And I have been saying this for a few years now.

Of course, my saying this hardly makes a difference, given that every time petrol and diesel prices rise, WhatsApp starts buzzing all over again with forwards blaming oil bonds issued by the UPA for high petrol and diesel prices. Currently, the price of petrol is more than Rs 100 per litre in several parts of the country.

This high price is on account of a higher excise duty collected by the central government in order to compensate for a fall in corporate tax collections. In that sense, you and I are bearing the cost of lower corporate taxes, in the form of a higher price of petrol and diesel. 

Let’s try and understand the issue of high petrol and diesel prices, and why things are the way they are, in some detail.

1) Crude oil prices have risen between last year and now. In June 2020, the average price of the Indian basket of crude oil was at $40.63 per barrel. As of June 16, 2021, the price was at $73.18 per barrel. Clearly, this is one reason behind the rise in petrol and diesel prices, but this isn’t the only reason, and not even the main one.

2) Before getting into any other detail, let’s understand what oil bonds are. These bonds were issued by the UPA government to the oil marketing companies (Indian Oil, Bharat Petroleum, Hindustan Petroleum), for the under-recoveries (the difference between the administrative price and the cost) they suffered when selling petrol, diesel, kerosene and domestic cooking gas, below their cost. This happened up until 2009-2010. Officially, these bonds are referred to as special securities issued to oil marketing companies in lieu of cash subsidy.

Instead of compensating companies immediately for the subsidy offered by them, by giving them money, the government gave them oil bonds, which would pay annual interest and mature a few years down the line. By doing this, the government expenditure during those years didn’t go up. This helped control the fiscal deficit in those years, when oil bonds were issued. Fiscal deficit is the difference between what a government earns and what it spends.

3) Of course, these bonds would mature over the years and the government of the day would have to repay them. And that would need money.
So what is the value of these bonds which the government still needs to repay?  In a question raised in the Rajya Sabha in December 2018, the government had said: “The current outstanding balance on account of Government of India (GoI) Special Bonds issued to the Public Sector Oil Marketing Companies (OMCs) in lieu of cash subsidy is about Rs 1.30 lakh crore.”

So, two and a half years back, the value of the outstanding oil bonds had stood at around Rs 1.30 lakh crore. What’s the latest number? Take a look at the following table. It has been sourced from the latest government budget. It lists out the different oil bonds that are still to be repaid, with their maturity dates.

Source: https://www.indiabudget.gov.in/doc/rec/allrec.pdf

What does this table tell us? It tells us that as of March 2021, the total outstanding oil bonds issued by the government stood at Rs 1,30,923 crore. Or the same as what the government had told the Rajya Sabha in December 2018.

4) In fact, the amount of outstanding oil bonds has barely changed during Modi government’s tenure. Look at the following tabled sourced from the 2014-15 budget, presented in July 2014, after Narendra Modi became prime minister.

Source: https://www.indiabudget.gov.in/budget2014-2015/ub2014-15/rec/annex6e.pdf

As of March 2014, the total outstanding oil bonds stood at Rs 1,34,423 crore. Two different oil bonds with maturity amounts of Rs 1,750 crore each, matured in 2014-15, on March 7, 2015, and March 23, 2015, respectively. This brought down to the total outstanding oil bonds to Rs 1,30,923 crore, and which is the current outstanding amount as well.  

The point being that the government hasn’t had to repay any outstanding oil bonds since March 2015. Of course, it has had to pay an interest on these oil bonds, like it does on all other bonds.

How much is this interest? As the government told the Rajya Sabha in December 2018: “The annual aggregated amount of Rs 9,989.96 crore was paid every year during 2015-16 to 2017-18 and the similar amount is required to be paid in the current financial year.”

Given that, the outstanding amount of oil bonds didn’t change through 2018-19, 2019-20 and 2020-21, the government would have paid the same amount as interest in each of these years, as it did during 2015-16 to 2017-18.

How does the situation look in 2021-22, the current financial year? As can be seen from both the tables (I know the tables are not very clear. If you really want to verify the data, the source of the tables is available just below them. All you need to do is click), Rs 5,000 crore of bonds are due to be repaid on October 16 and November 28, respectively, later this year. This amounts to Rs 10,000 crore in total.

Over and above this, interest needs to be repaid on the outstanding bonds. Given that Rs 10,000 crore worth of bonds of the total Rs 1,30,923 crore of oil bonds, will be repaid during this financial year, the interest to be paid on the remaining bonds will be less than Rs 9,989.96 crore that the government has been paying year on year. A back of the envelope calculation tells us that the interest to be paid this year should amount to around Rs 9,500 crore.

Hence, in total, the government needs Rs 19,500 crore to repay oil bonds as well as pay interest on them during 2021-22. When it comes to government finances, this is small change.

5) If we look at the excise duty collected on petroleum products over the years, data from Petroleum Planning and Analysis Cell tells us that it stood at Rs 99,068 crore in 2014-15, the financial year in which Narendra Modi was sworn in as prime minister.

The number reached Rs 2,23,057 crore in 2019-20. It touched Rs 2,35,811 crore between April and December 2020, the first nine months of 2020-21. Given this, it would have crossed Rs 3,00,000 crore during 2020-21.

In 2021-22, the central government expects to collect more than Rs 3,00,000 crore through excise duties on petroleum products. A look at this year’s budget tells us that the government hopes to collect Rs 74,350 crore on special additional duty of excise on motor spirit(petrol) and Rs 1,98,000 crore through duty of excise on motor spirit and high-speed diesel oil (road and infrastructure cess). Just this adds to close to Rs 2.75 lakh crore.

Over and above this, one needs to pay a basic excise duty on every litre of petrol and diesel purchased, and there is an agriculture infrastructure and development cess to be paid as well. Clearly, this year, the government will earn more than Rs 3 lakh crore from different kinds of excise duties on petroleum products.

From February 2, 2021, the total excise duty on petrol and diesel has stood at Rs 32.90 per litre and Rs 31.80 per litre, respectively. The total central excise duties on petrol and diesel have been rising since 2014. They had stood at Rs 10.38 per litre and Rs 4.52 per litre in March 2014.

In fact, even in April 2020, they had stood at Rs 22.98 per litre and Rs 18.83 per litre, respectively.

Between April last year and now, the petrol price is higher by close to Rs 10 per litre just because of higher central government taxes on it. When it comes to diesel, it is higher by close to Rs 13 per litre because of this.

6) There is another small reason for higher prices as well. The state government taxes on petrol and diesel are ad valorem, that is they are a certain percentage of the price charged to dealers plus the excise duty of the central government plus the dealer commission on every litre of petrol and diesel sold.

Take a look at the following table, which has the detail for petrol sold in Delhi.

Source: https://www.bharatpetroleum.com/pdf/MS_Webupload_16.06.2021.pdf.

The price of petrol charged to dealers in Delhi by Bharat Petroleum was at Rs 37.68 per litre as on June 16. On this there was an excise duty charged by the central government of Rs 32.90 per litre along with a dealer commission of Rs 3.80 per litre. This adds up to Rs 74.38 per litre.

On this, the Delhi government charges a value added tax of 30%, which amounts to Rs 22.32 per litre. This leads to a retail selling price of Rs 96.70 per litre (Rs 74.38 plus Rs 22.32) in Delhi.

Like, the Delhi government, other state governments also charge a value added tax or a sales tax on petrol and diesel sold in their respective territories. The 30% tax charged by the Delhi government is ad valorem. Hence, if the petrol price charged to dealers goes up as oil price goes up, the tax collected by the Delhi government also goes up.

Over and above this, when the central government increases the excise duty on petrol, the tax collected by the Delhi government (and all other governments) goes up because the state government charges a value added tax on dealer price plus excise duty plus dealer commission.

Hence, every time you and I buy petrol or diesel, we are paying a tax on tax. This is an anomaly that needs to be set right. And state governments need to charge a sales tax just on the dealer price and commission, and not on the central government excise duty as well.

7) A major reason for the central government implementing a high excise duty on petrol and diesel, lies in the fact that the government’s tax revenues as a proportion of the size of the Indian economy, measured by the gross domestic product (GDP), has been falling over the years.

Look at the following chart. It plots the ratio of gross tax revenue earned by the central government as a proportion of the GDP.


Source: Centre for Monitoring Indian Economy and Controller General of Accounts.

What does this chart show? It shows that the gross tax revenue as a percentage of the GDP reached an all-time high of 12.11% in 2007-08. The gross tax revenue was at 11.22% of the GDP in 2017-18 and fell to 10.25% of the GDP in 2020-21.

The recent fall has been more because of a fall in corporate tax collections. In 2017-18, the corporate tax collections amounted to a total of 3.34% of the GDP and fell to 2.32% of the GDP in 2020-21. This was despite the listed companies registering bumper profits during the financial year.

Corporate taxes have come down primarily on account of the base tax rate being cut from 30% to 22% in September 2019 and to 15% from the earlier 25% for new manufacturing companies.

In absolute terms, the total corporate tax collected in 2019-20 had stood at Rs 5.57 lakh crore. It fell to Rs 4.57 lakh crore in 2020-21, thanks to lower tax rates. The collections of the goods and services tax have also not gone along expected lines.

To compensate for this to some extent, the government has had to increase the excise duty on petroleum products. Hence, it is only fair to say that the cost of lower corporate tax rates for the government, is being borne by citizens in the form of higher petrol and diesel prices. There is no free lunch, as I keep reminding.

To conclude, while the revenue earned by the government can vary, its expenditure doesn’t. It usually goes up year on year. In 2017-18, the total expenditure to GDP ratio stood at 12.53%. This jumped to 17.47% in 2020-21. Of course, 2020-21, could very well be an anomaly given that the size of the economy (GDP) contracted.

Nevertheless, the expenditure in 2019-20 had also stood at a higher 13.20% of the GDP, while the gross tax collections fell. And someone had to pay for this.