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After drop in petrol and diesel prices, will GST and direct tax collections be enough to make up for the loss to the exchequer?

Centre slashes fuel prices slashed

The Centre, which finally drastically slashed domestic fuel prices, is hoping to make up a part of the losses by higher collection of goods and services tax along with direct tax. Hit by surging inflation, on Saturday the Narendra Modi government announced lowering of excise duty for petrol and diesel. While petrol price has been reduced by Rs 9.5 a litre, diesel is down by Rs 7. Finance Minister Nirmala Sitharaman said that the move will cost Rs 1 lakh crore to the exchequer.

India’s retail inflation in April soared to 7.79 per cent – an eight-year-high.

While the move is aimed at providing relief to the common man, economists warned that such measures may not be prudent at this juncture.

“The need of the hour is to cool inflationary trends. We have to look at bringing down inflation and the decision (of slashing fuel prices) has to be taken,” Gopal Krishna Agarwal, BJP’s spokesperson for economic affairs, told India Narrative.

A report by the State Bank of India noted that the latest inflation numbers revealed that while in the rural areas, the impact has been disproportionately higher for food prices, the urban areas are hit by surge in fuel prices.

Agarwal however also said that several state governments especially those ruled by the opposition parties have been reluctant in cooperating with the Centre.

“Many states, especially those where the opposition parties are in power, are not cooperating. They did not pay heed to requests made by the Centre to reduce value added tax (VAT),” Agarwal said, adding that the oil marketing companies are continuing to make losses.

To add to the problem, in many cases state public buses in a bid to cut costs, have also started refilling fuel from retail fuel pumps instead of their depots. 

Moody’s Investors Service in its report in March said that state-owned fuel retailers such as Indian Oil Corporation, BPCL and HPCL together have lost revenue worth $2.25 billion or Rs 17,000 crore between November and March by keeping fuel prices unchanged even as global crude oil prices went northward.

However, sources said that oil marketing companies may be forced to increase prices in the near future to cut their losses.

“We are going through uncertain times and good economics will be key. We need to draw lessons from neighbouring countries and avoid the mistakes they made. For this we, as a nation –whether ruling party or in opposition, must come forth in keeping the nation’s interest first,” an analyst with a think tank said.

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