In the past few months, retail prices of petrol and diesel have consistently increased and have reached all-time high levels.  On September 24, 2018, the retail price of petrol in Delhi was Rs 82.72/litre, and that of diesel was Rs 74.02/litre.  In Mumbai, these prices were even higher at Rs 90.08/litre and Rs 78.58/litre, respectively.

The difference in retail prices in the two cities is because of the different tax rates levied by the respective state governments on the same products.  This blog post explains the major tax components in the price structure of petrol and diesel and how tax rates vary across states.  It also analyses the shift in the taxation of these products, its effect on retail prices, and the consequent revenue generated by the central and state governments.

What are the components of the price structure of petrol and diesel?

Retail prices of petrol and diesel in India are revised by oil companies on a daily basis, according to changes in the price of global crude oil.  However, the price paid by oil companies makes up 51% of the retail price in case of petrol, and 61% in the case of diesel (Table 1).  The break-up of retail prices of petrol and diesel in Delhi, as on September 24, 2018, shows that over 45% of the retail price of petrol comprises central and states taxes.  In the case of diesel, this is close to 36%.

At present, the central government has the power to tax the production of petroleum products, while states have the power to tax their sale.  The central government levies an excise duty of Rs 19.5/litre on petrol and Rs 15.3/litre on diesel.  These make up 24% and 21% of the retail prices of petrol and diesel, respectively.

Table 1

While excise duty rates are uniform across the country, states levy sales tax/value added tax (VAT), the rates of which differ across states.  The figure below shows the different tax rates levied by states on petrol and diesel, which results in their varying retail prices across the country.  For instance, the tax rates levied by states on petrol ranges from 17% in Goa to 39% in Maharashtra.

Effective Sales Tax

Note that unlike excise duty, sales tax is an ad valorem tax, i.e., it does not have a fixed value, and is charged as a percentage of the price of the product.  This implies that while the excise duty component of the price structure is fixed, the sales tax component is charged as a proportion of the price paid by oil companies, which in turn depends on the global crude oil price.  With the recent increase in the global prices, and subsequently the retail prices, some states such as Rajasthan, Andhra Pradesh, West Bengal, and Karnataka have announced tax rate cuts.

How have retail prices in India changed vis-à-vis the global crude oil price?

India’s dependence on imports for consumption of petroleum products has increased over the years.  For instance, in 1998-99, net imports were 69% of the total consumption, which increased to 93% in 2017-18.  Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products.  The following figures show the trend in price of global crude oil and retail price of petrol and diesel in India, over the last six years.

Petrol

Diesel

The global price of crude oil (Indian basket) decreased from USD 112/barrel in September 2012 to USD 28/barrel in January 2016.  Though the global price dropped by 75% during this period, retail prices of petrol and diesel in India decreased only by 13% and 5%, respectively.  This disparity in decrease of global and Indian retail prices was because of increase in taxes levied on petrol and diesel, which nullified the benefit of the sharp decline in the global price.  Between October 2014and June 2016, the excise duty on petrol increased from Rs 11.02/litre to Rs 21.48/litre.  In the same period, the excise duty on diesel increased from Rs 5.11/litre to Rs 17.33/litre.

Over the years, the central government has used taxes to prevent sharp fluctuations in the retail price of diesel and petrol.  For instance, in the past, when global crude oil price has increased, duties have been cut.  Since January 2016, the global crude oil price has increased by 158% from USD 28/barrel to USD 73/barrel in August 2018.  However, during this period, excise duty has been reduced only once by Rs 2/litre in October 2017.  While the central government has not signalled any excise duty cut so far, it remains to be seen if any rate cut will happen in case the global crude oil price rises further.  With US economic sanctions on Iran coming into effect on November 4, 2018, India may face a shortfall in supply since Iran is India’s third largest oil supplier.  Moreover, Organization of Petroleum Exporting Countries (OPEC) and Russia have not indicated any increase in supply from their side yet to offset the possible effect of sanctions.  As a result, in a scenario with no tax rate cut, this could increase the retail prices of petrol and diesel even further.

How has the revenue generated from taxing petroleum products changed over the years?

As a result of successive increases in excise duty between November 2014 and January 2016, the year-on-year growth rate of excise duty collections increased from 27% in 2014-15 to 80% in 2015-16.  In comparison, the growth rate of sales tax collections was 6% in 2014-15 and 4% in 2015-16.  The figure below shows the tax collections from the levy of excise duty and sales tax on petroleum products.  From 2011-12 to 2017-18, excise duty and sales tax collections grew annually at a rate of 22% and 11%, respectively.

Tax revenue

How is this revenue shared between centre and states?

Though central taxes are levied by the centre, it gets only 58% of the revenue from the levy of these taxes.  The rest 42% is devolved to the states as per the recommendations of the 14th Finance Commission.  However, excise duty levied on petrol and diesel consists of two broad components – (i) excise duty component, and (ii) road and infrastructure cess.  Of this, only the revenue generated from the excise duty component is devolved to states.  Revenue generated by the centre from any cess is not devolved to states.

The cess component was increased by Rs 2/litre to Rs 8/litre in the Union Budget 2018-19.  However, this was done by reducing the excise duty component by the same amount, so as to keep the overall rate the same.  Essentially this provision shifted the revenue of Rs 2/litre of petrol and diesel from states’ divisible pool of taxes to the cess revenue, which is entirely with the centre.  This cess revenue is earmarked for financing infrastructure projects.

At present, of the Rs 19.5/litre excise duty levied on petrol, Rs 11.5/litre is the duty component, and Rs 8/litre is the cess component.  Therefore, accounting for 42% share of states in the duty component, centre effectively gets a revenue of Rs 14.7/litre, while states get Rs 4.8/litre.  Similarly, excise duty of Rs 15.3/litre levied on diesel consists of a cess component of Rs 8/litre.  Thus, excise duty on diesel effectively generates revenue of Rs 12.2/litre for the centre and Rs 3.1/litre for states.

On January 17, 2020, the Ministry of Health and Family Welfare acknowledged the emergence of COVID-19 that was spreading across China. On January 30, 2020, the country’s first COVID-19 positive case was reported in Kerala.  By March 11, 2020, the World Health Organisation declared COVID-19 as a global pandemic.  This blog summarises the key policy measures taken by government of Kerala to respond to the pandemic.  

As on April 22, Kerala has had 427 confirmed cases of COVID-19, of which 307 have recovered (highest rate of recovery in the country). Only three deaths have been recorded in the state so far.

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Pre-lockdown period: Early measures for containment

Following the first confirmed case involving a returnee from Wuhan, China, the initial responses by the state were aimed at surveilling, identifying, and conducting risk-based categorisation of all passenger arrivals from China and others who had come in close contact with these travellers. As two more cases were confirmed on February 2 and 3, the state government declared a health emergency in the state. 

Subsequently, a health advisory was issued to track, identify, and test all travellers with a travel history to Wuhan since January 15, 2020.  Such passengers and their close contacts were to be kept in isolation for 28 days.  The advisory also directed all lodging establishments to maintain a register of travellers with travel histories to corona-affected countries. A similar advisory was issued for student returnees as well. With no further confirmed cases being reported immediately, on February 12, the state withdrew the health emergency.  However, a high state of response and surveillance continued to be applied.

Second wave of infections

When a second wave of infections began spreading in early March, the government took several multi-pronged measures to address the threat. The following measures were taken in this regard:

  • Health measures: Revised guidelines for the clinical management of COVID19 patients, covering testing, quarantine, hospital admission, and discharge, were issued.  
     
  • Instructions were issued regarding airport safety protocols as well as testing of foreign nationals entering and exiting the state. All foreign arrivals, even if asymptomatic, were to be kept in isolation until their test reports were available. 
     
  • Further guidelines and precautions on social distancing and various hygiene norms, such as, use of sanitsers, were also issued to malls, shopping centres, and salons
     
  • Movement restrictions: All non-medical educational institutions, including anganwadis and madrassas were immediately shut down till March 31 and exams of classes 1-7 were postponed. Exams for classes 8 and above were to be held as scheduled. University exams were also postponed till March 31.
     
  • Government departments were asked to make temporary arrangements regarding working hours of their employees. Officials were also instructed to look into welfare measures for migrant workers.
     
  • Guidelines were also issued to private establishments regarding working time, safety measures, and leave for employees.
     
  • Administrative Measures: On March 17, COVID19 was declared a notified disaster, thus becoming eligible for funds from the State Disaster Response Fund (SDRF). SDRF is the primary fund available with state governments for responses to notified disasters. Notifying a disaster enables states to spend more from the SDRF to fight the said disaster.
     
  • In order to better coordinate the state’s response, the government issued instructions to constitute COVID-19 cells in all departments. Meetings and inspections by government officials were also to be avoided. 
     
  • Local Self Government institutions were assigned various roles and responsibilities. These include: (i) running awareness programs, such as, ‘Break the Chain’ initiative, (ii) conducting sanitation and cleanliness drives, (iii) regular outreach to home isolated/quarantined persons, (iv) activating committee system to manage responsibilities, (v) ensuring availability of essential commodities, (vi) categorising and ensuring available response mechanisms, such as, material resources, volunteers, medical resources etc, and (vii) ensuring special attention to vulnerable populations, such as senior citizens, and persons with co-morbidities or undergoing special treatments. 

The lockdown period

On March 23, Kerala announced a state-wide lockdown till March 31.  A day later, the central government announced a nation-wide 21-day lockdown.  

Restrictions imposed under the state’s order included: (i) stoppage of all forms of passenger transport services, (ii) prohibition of a gathering of more than five persons, and (iii) closure of all commercial establishments, officers, and factories, except those exempted.  Use of taxis, autos or private vehicles was permitted only for procurement of essential commodities or for medical emergencies. Establishments providing essential goods and services such as banks, media, telecom services, petrol bunks, and hospitals were permitted to operate.  

On April 15, the central government extended the lockdown till May 3.  Some of the key measures undertaken during the lockdown period are: 

Administrative Measures

  • A round-the-clock war room, comprising members of different departments, was set up to monitor and supervise all COVID-19 containment activities. 
     
  • Corona media cell was set up to monitor and tackle the threat of fake news surrounding COVID19.  
     
  • With the legislature not in session, the Kerala Epidemic Diseases Ordinance, 2020 was promulgated by the Governor of Kerala on March 26. The Ordinance empowers the state government to undertake necessary measures and specify regulations to counter the threat of an epidemic disease.  It also specifies a penalty for those who violate orders made under this Ordinance. 

Healthcare Measures

Essential Goods and Services

  • On March 25, the state declared a list of essential services under the Kerala Essential Services Maintenance Act, 1994. 
     
  • Various exemptions from lockdown were issued to services that were later deemed essential. These include: (i) shops and bakeries, including departmental stores, (ii) online food deliveries, (iii) parcel services, for delivery of essential goods, (iv) automobile service workshops, (v) shops and service centres for mobile phones, computers etc, only on Sundays, and (vi) plumbers and electricians to undertake maintenance work in houses and flats. 
     
  • On April 3, orders were issued to set up community kitchens under the aegis of Kudumbasree and Local Self Governments (LSGs). Kudumbasree is the poverty eradication and women empowerment programme implemented by the Kerala government. As on April 20, a total of 339 Community Kitchens have been functioning in 249 panchayats across 14 districts of the state. They have served a total of 5,91,687 meals since April 4, 2020. The government has also instructed LSGs to hire volunteers for the kitchen and pay them an honorarium of Rs. 400 (for one-time service) or Rs. 650 (for the whole-day).

Welfare Measures

  • Under SDRF norms, funds were released to the Health Department for relief and response activities for COVID-19. 
     
  • Each District Collector has been allocated Rs. 50 lakh for carrying out various COVID-19 outbreak-related control and prevention activities.
     
  • Financial assistance has been sanctioned to (i) fishermen, (ii) artists, (iii) lottery agents and sellers, and (iii) elephants and other such animals being looked after. 
     
  • A 2000-crore worth Chief Minister’s Helping Hand Loan Scheme was announced for people facing lockdown-related unemployment and hardships. The scheme will be operationalised through neighbourhood groups under the aegis of Kudumbasree. 

Post-lockdown strategies – Strategies easing lockdown relaxations

  • Expert Committee: On April 4, an Expert Committee was constituted by the government and on April 6, the Committee submitted its Report on the guidelines for post-lockdown regulations. It recommended a conditional, three-phase strategy, with districts being the unit of implementation. Relaxations would be progressively eased in each phase depending on criteria, such as, (i) number of new confirmed cases, (ii) percentage increase/decrease in number of persons under home surveillance, and (iii) no emergence of hotspots.. 
     
  • Containment Guidelines: After the lockdown was extended till May 3, the state released revised guidelines for containment, that recommended classification of districts into four zones, based on number of cases and disease threat. The zones – Red, Orange A, Orange B, and Green – would have different, graded restrictions, with Red having stringent restrictions in the form of a lockdown till May 3. The Orange A and B zones would have a lockdown till April 24 and 20 respectively, followed by a partial relaxation thereafter. Green zone would have a lockdown till April 20 and relaxation in restrictions thereafter.
     
  • Based on the above order, the state issued an advisory for industrial units to follow while resuming operations. Some of the Standard Operating Procedures to be followed include: (i) conducting disinfectation of premises, machinery, and vehicles, (ii) arranging exclusive transportation facilities with vehicles operating at 30-40% capacity, (iii) mandatory thermal scanning of people, (iv) following hygiene and social distancing norms, including a cap on elevator capacities and size of meetings (v) mandatory corona-related insurance cover for workers, (vi) mandatory use of CCTVs, and (vii) preparing a list of nearby COVID-19 hospitals .

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.