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Government collected INR5.2t from petroleum sector in FY17
Petroleum products unlikely to be included under GST even at a later stage
29 June 2017
The Economy Observer
It is generally argued that the states appealed to keep key petroleum products out of the GST ambit, citing them as
their main source of income. However, the center’s dependence on petroleum products is just as high. Also, it is the
central government that has played with prices in recent years.
In FY17, the central government collected INR3.35t from the petroleum sector, amounting to 16% of gross receipts,
while the state governments received INR1.89t – 16% of their own receipts. Further, the central tax on diesel and
petrol (per liter) increased 4x and 2x, respectively over the past three years. State taxes, on the other hand, increased
by just ~20%, even lower than the increase in dealer commissions.
Considering consumers’ welfare, bringing retail fuel products under GST would be favorable, as they are probably the
highest taxed items. However, the inclusion of excluded petroleum products under GST would have hurt the center
more than the states. Who would then push to include excluded petroleum products under GST at a later stage?
The Goods & Services Tax (GST) will be implemented from July 1, 2017. One of the
major compromises made to make GST a reality was the exclusion of petroleum
products#. Though it is generally believed that states had appealed to exclude
petroleum products, we argue that the center would have lost higher revenues had
all petroleum products been brought under GST.
Contribution of petroleum sector to the government(s)
As per recent data released by the Petroleum Planning & Analysis Cell (PPAC), the
The general government
central government collected INR3.34t from the petroleum sector in FY17, of which
(center + states) collected
INR2.4t was collected as excise duty. Further, the state governments collected
INR5.22t from the
petroleum sector,
another INR1.88t from the petroleum sector, majority of which was in the form of
accounting for 16% of all
sales tax/VAT on petroleum products
(Exhibit 1).
Overall, the general government
total receipts in FY17 – the
(center + states) collected INR5.22t from the petroleum sector, accounting for 16%
highest in a decade
of all total receipts in FY17 – the highest in a decade
(Exhibit 2).
Exhibit 1:
Total receipts from the petroleum sector for the
center and states (INR b)
5,600
4,200
2,800
1,400
0
Center
States
17.4 16.8
Exhibit 2:
Center’s receipts from petroleum sector have
increased disproportionately (% of gross receipts)
General government
14.9
14.6 14.4 14.9 14.0 15.0 14.0
13.7 13.6
16.0
Source: PPAC, Reserve Bank of India (RBI), CEIC, MoSL
# Please note only five products – crude oil, natural gas, aviation fuel, patrol & diesel – have been excluded, while other products such as kerosene,
naphtha and LPG are included under GST. However, since no product-wise break-up is available, we discuss the total contribution of the petroleum
sector to the governments in this note.
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Center has gained immensely from lower global crude oil prices…
The share of petroleum
sector in total excise
collected by the center
increased from 46% in FY14
to ~63% in FY17
As global crude oil prices crashed from June 2014, the central government didn’t
feel the pain. In fact, as the center began to hike the excise duty on petroleum
products, total excise collected from the POL (petroleum, oil & lubricants) items
witnessed the highest-ever growth in the subsequent three years – 27% in FY15,
80% in FY16, and ~36% in FY17
(Exhibit 3).
Not surprisingly, the share of petroleum
sector in the center’s total excise collection increased from 46% in FY14 to ~63% in
FY17
(Exhibit 4).
The share of total contribution from the petroleum sector
(including other taxes and non-tax receipts) increased from 11% in FY14 to 16% of
gross receipts in FY17.
Exhibit 4:
Contribution of excise collected from petroleum
sector has increased for the center
(% of total excise )
60.7
42.4 44.1 44.3
49.8
49.4 47.6
41.7
46.0
Exhibit 3:
Excise collection from non-POL items has also
improved in the past few years for the center (% YoY)
90
60
30
0
-30
-60
POL items
Non-POL items
Central government
62.0 62.7
52.7
Source: PPAC, Union Budget documents, CEIC, MoSL
…but states have failed to benefit
The contribution of
petroleum sector to state
governments’ own receipts
fell from 18% in FY14 to
16% in FY17
In contrast to the center, sales tax/VAT collected from the petroleum sector grew
much slower for state governments (average growth of 9% over the past three years
for states versus ~48% growth for the center), which was also in line with subdued
growth in non-POL items
(Exhibit 5).
Consequently, the contribution of petroleum
sector to state governments’ own receipts fell from 18% in FY14 to 16% in FY17
(Exhibit 6).
Its contribution to total VAT collection by states has been unchanged at
about 30% since FY10.
Exhibit 6:
Contribution of VAT collected from petroleum
sector has fallen for states
(% of own receipts)
18.4
17.4
16.8
16.5
15.6
15.9
17.8
17.5
Exhibit 5:
Excise collection from non-POL items has also
remained subdued for state governments (% YoY)
60
45
30
15
0
-15
POL items
Non-POL items
State governments
17.9
17.0
15.6
16.0
Source: PPAC, State Budgets, CEIC, MoSL
30 June 2017
2

Central excise duty on petrol stands at 81%...
While the price of petrol
before taxes and
commission is down 42% to
INR27.03/liter in the past
three years, the central
excise has more than
doubled to INR21.98/liter
and states’ VAT is up 17% at
INR13.92/liter
Finally, it is also interesting to look at the change in excise on petrol and diesel by
the center and the states during the past three years when the global crude oil
prices crashed by ~75%. In April 2014, when crude oil price was USD110/barrel, the
price of petrol before taxes and commission was INR47.13/liter. On top of that, the
central excise duty was INR10.38/liter and states’ VAT was INR11.9/liter. After three
years, in May 2017, while the price of petrol before taxes and commission is down
42% to INR27.03/liter, the central excise has more than doubled to INR21.98/liter
and states’ VAT is up 17% at INR13.92/liter
(Exhibit 7).
It implies that the effective
central excise duty jumped from 22% in April 2014 to 81% in May 2017, while the
states’ VAT on petrol increased from 25% to 51%
(Exhibit 8).
Exhibit 8:
…while the tax rate has increased from 22% to
more than 80% (%)
Central taxes
State taxes
10
7
34
4
25
22
4
25
22
5
26
27
65
8
42
60
8
45
72
96
55
9
53
Exhibit 7:
Central excise on petrol has more than doubled in
absolute terms (INR/litre)…
25
20
15
10
5
0
Central taxes
State taxes
Dealer commission
10
55
9
51
9
52
9
51
8
48
70
6
32
52
86
95
80
82
81
Source: PPAC, CEIC, MoSL
The effective central excise
duty on diesel jumped from
10% three years ago to 66%
in May 2017, while the
states’ VAT rate doubled
from 15% to 30%
Similarly, while the price of diesel before taxes and commission has declined ~40%
between April 2014 and May 2017, the central excise duty has almost quadrupled
from INR4.52/liter in April 2014 to INR17.83/liter and the state VAT rate has
increased 23% to INR8.07/liter
(Exhibit 9).
In other words, the effective central
excise duty on diesel jumped from 10% three years ago to 66% in May 2017, while
the states’ VAT rate doubled from 15% to 30%
(Exhibit 10).
Exhibit 10:
…while the tax rate has jumped from 10% to
more than 65% (%)
Central taxes
State taxes
8
38
5
25
41
5
25
41
6
31
72
6
32
6
30
66
5
28
58
6
30
65
6
30
66
…while it is more than 65% for diesel
Exhibit 9:
Central excise on diesel has more than quadrupled
in absolute terms (INR/litre)…
20
15
10
5
0
Central taxes
State taxes
Dealer commission
3
15
10
3
15
10
3
15
13
4
19
37
4
18
32
94
75
Source: PPAC, CEIC, MoSL
30 June 2017
3

Center to be more affected by inclusion of petroleum products under GST
The exceptionally high effective central excise duty rate of more than 80% on petrol
and 65% on diesel would certainly have fallen dramatically had these products been
included under GST. With states’ effective VAT rate at comparatively lower level of
51% for petrol and 30% for diesel, the center would have lost disproportionately
higher share of revenues from the petroleum sector.
It is clear that the center
would have lost more
revenues than the states,
had excluded petroleum
products been brought
under GST ambit
Considering consumers’ welfare, retail fuel is probably the highest taxed product in
the economy. Nevertheless, it is also clear that the center would have lost more
revenues than the states had excluded petroleum products been brought under GST
ambit. If global crude oil prices don’t increase significantly, the central excise duty is
most likely to remain at elevated levels for a long period of time. The question then
is: who would push to include excluded petroleum products under GST at a later
stage?
Finally, we would not be surprised if the retail selling prices of retail fuel products,
which are out of GST, continue to move up, as states try to gather revenues to
finance their spending. For instance, Maharashtra hiked the surcharge on petrol by
INR3/liter in April 2017 and by another INR2/liter in May 2017. Tamil Nadu raised
VAT on petrol from 27% to 34% and on diesel from 21.4% to 25% in March 2017.
30 June 2017
4

NOTES
30 June 2017
5

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