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GDP: Government, Diesel, Petrol, and how it impacts you

Outside the Eco-Chamber
Last Updated 31 July 2022, 03:18 IST

On July 25, in answer to a question raised in the Lok Sabha, the government said that in 2021-22, it had earned an excise duty of Rs 3.63 lakh crore from petroleum products. In 2014-15, the total excise duty collected from petroleum products was Rs 99,068 crore.

This jump in collections has come from a massive increase in excise duty on petrol and diesel. In October 2014, the excise duty on petrol and diesel stood at Rs 9.48 per litre and Rs 3.56 per litre, respectively. Thereon, the government kept increasing the excise duty. By May 2020, the excise duty on petrol and diesel had gone up to Rs 32.98 per litre and Rs 31.83 per litre, respectively.

Since then, as oil prices have surged, the government has cut the excise duty on petrol and diesel twice. They currently stand at Rs 19.9 and Rs 15.8, respectively.

Cutting the excise duty became a necessity after a surging oil price ensured that the price of petrol and diesel crossed Rs 100 per litre at many places. The cut in excise duty explains why the government ended up collecting a lower Rs 3.63 lakh crore in 2021-22, against Rs 3.73 lakh crore in 2020-21.

So, why did the government have to raise excise duty on petrol and diesel in the first place? A part of it can be explained by the slow growth and later fall of corporate tax collections. In 2013-14, the total corporate tax collections had stood at Rs 3.95 lakh crore. By 2016-17, three years later, they stood at Rs 4.85 lakh crore, a growth of 7% per year, in a period during which the overall economy grew by 10.8% per year (not adjusted for inflation).

The absolute numbers do not take into account the increase in the size of the Indian economy during the period. In 2013-14, corporate taxes as a percentage of GDP stood at 3.51% of GDP. By 2016-17, they had fallen to 3.15% of GDP. This is when the first round of excise duty increases on petrol and diesel happened.

The corporate tax collections then recovered for the next two financial years, but they fell to 2.99% of GDP in 2019-20, before the Covid pandemic.

As the economy contracted, the collections fell to 2.31% of GDP in 2020-21. In absolute terms, they amounted to Rs 4.58 lakh crore. This is when the second round of excise duty increases on petrol and diesel happened.

In 2021-22, the corporate tax collections rebounded to Rs 6.35 lakh crore, or 2.68% of GDP. This is an impact of a recovering economy. It is also an impact of the increasing formalisation of the economy, where larger formal firms are gaining greater market share at the cost of informal ones and, in the process, driving up their sales and profits.

Nonetheless, we have been led to believe that the increase in tax collections is because in September 2019, the government cut the base corporate tax rate to 22% from the earlier 30%.

How much sense does this make? Let’s consider a sample of more than 5,000 companies listed on the stock exchanges. From 2018-19, the year before the corporate tax rate was cut, to 2021-22, the last financial year, the profit before tax of these companies has more than doubled. In comparison, the corporate income tax paid by these companies went up by only 20%. This helped drive the net profit of these companies by more than 170%.

Clearly, the government isn’t able to collect as much tax from these companies as it would have had in the earlier era of a higher corporate income tax rate. This logic is applicable to unlisted companies as well.

This has meant that the government has had to borrow more than it would have if the corporate income tax rates had continued to be at the earlier levels. This higher borrowing has had an impact on you and me as well.

Until recently, before high inflation became a concern, the Reserve Bank of India, as the debt manager for the government, was maintaining low interest rates. This was done to help the government borrow at lower rates. In fact, the low interest rates also helped corporates, with the interest they needed to pay on their loans coming down. This drove up their profits even further.

Of course, you and I bore the cost of this in the form of lower interest rates on our deposits. We also benefited in the form of lower interest rates on our loans. That’s the long and short of it.

(Vivek Kaul lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics.)

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(Published 30 July 2022, 18:41 IST)

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