States increase petroleum tax revenue to fund COVID-19 battle; large share with the centre

04 May 2020
The price of crude oil that India imports has declined from Rs 3,961 per barrel on 21 February to Rs 1,523 on 1 May.
Prashanth Vishwanathan / Bloomberg / Getty Images
The price of crude oil that India imports has declined from Rs 3,961 per barrel on 21 February to Rs 1,523 on 1 May.
Prashanth Vishwanathan / Bloomberg / Getty Images

On 21 April, Assam increased the rate at which it taxes petrol and diesel. It issued a notification that in effect raised the price of petrol from Rs 71.61 to Rs 77.46 per litre and of diesel from Rs 65.07 to Rs 70.50 per litre. With the state under lockdown and economic activity effectively coming to a halt, this was one of the few ways in which Assam could raise money to pay salaries of government employees or fund health expenditure in fighting COVID-19. “The state relies heavily on taxes from petroleum and that is the reason for the increase, because there are no other sources of revenue, even in a post-lockdown scenario,” an official in the finance department of Assam, who requested anonymity, told me.

There are two ways in which Assam earns revenue from petroleum. The state is one of the few in India which has onshore oil fields. Royalties on oil drilled in Assam contribute around two thousand and five hundred crore rupees per year to the state’s revenue, according to the official, but since they are benchmarked to international crude oil prices, which have sharply fallen since the COVID-19 outbreak, this revenue stream has slowed to a trickle. The other is Value Added Tax, or VAT, on sales of petrol and diesel, which the official said used to contribute Rs 3,000 crore to the state exchequer. The lockdown has virtually dried up this revenue stream as well.

Sales tax collection—taxes from petroleum constitute a major portion of this—contributes 23 percent to Assam’s tax revenue. A collapse of almost a fourth of the tax base can be catastrophic for the state exchequer. Assam is not unique; all states in the Indian union have undergone a similar collapse in tax revenues due to the COVID-19 induced lockdown. At the same time, states have had to suddenly ramp up spending on medical infrastructure.

However, the architecture of petroleum pricing in India is such that a large part of petroleum tax revenues go to the centre. The import price of oil in India is a weighted average of two international benchmarks—Dubai and Oman, and Brent crude. Dubai and Oman is the benchmark for oil pumped in the Middle East. Brent crude is the classification for oil pumped in the North Sea. It is one of two benchmarks used for oil trading worldwide. The prices of Brent crude have crashed, from above fifty dollars on 10 February to a little over twenty six dollars as of 3 May. Consequently, the price of crude oil that India imports has also declined from Rs 3,961 per barrel on 21 February to Rs 1,523 on 1 May. 

Yet, the fall in import prices has not resulted in a fall in retail prices. “Although global crude prices have fallen, they are not reducing for the Indian consumer,” Sumit Dutt Majumdar, a former chairman of the Central Board of Indirect Taxes and Customs, an agency that formulates policy concerning customs and central excise duties, told me. “There is a mechanism for pricing petroleum through which a large part of the tax revenue goes to the central government. Global crude prices are low while Indian retail prices are high and a lot of the margin goes to the union government.”

Tushar Dhara is a reporting fellow with The Caravan. He has previously worked with Bloomberg News, Indian Express and Firstpost and as a mazdoor with the Mazdoor Kisan Shakti Sangathan in Rajasthan.

Keywords: COVID-19 petroleum petrol oil Crude oil