Will reducing cess levies ease high fuel prices?

By Aman|Updated : July 5th, 2021

Ratings agency ICRA recently proposed that the government had room to cut cess levies on retail prices of petrol.

This article discusses scope of cutting taxes on fuel, benefits and how it will impact RBI in its fight against inflation.

Table of Content

Will reducing cess levies ease high fuel prices? 


  • Ratings agency ICRA recently proposed that the government had room to cut cess levies on retail prices of petroleum which will ease inflation which is over 6% right now.

Is there room to cut taxes? 

The ICRA anticipates an increase in economic activity and mobility after vaccination which would increase fuel consumption. The government revenue from the cesses imposed on these two fuels is ₹3.6 lakh crore this fiscal. It thinks the government can cut up to ₹4.50 per litre for petrol and diesel each by avoiding extra tax.

How much tax do people pay on petrol?

 As of June 2021, taxes accounted for close to 58% of the price of petrol in Delhi. 

During May 2014 - June 2021, the Centre’s share of taxes on the retail price of petrol rose 216%, at the same time, base price of fuel declined.

Will it affect the government’s ability to pay interest and principal on oil bonds?

  •   Central govt needs ₹20,000 crore in the 2021-22 to service the interest and principal related to special oil bonds issued to oil marketing companies (OMCs) in the period 2005-2010.
  • To offset this debt obligation through additional revenues collected from fuel cesses, the potential duty cut could be to the tune of ₹2 per litre for both fuels.
  • These bonds are 
  • interest-bearing, have a fixed rate and are paid on a 6 monthly basis. 
  • 2021 bUdget provided 10k crore for it.

How can lower fuel prices help RBI?

  • Consumer price index (CPI) has been consistently higher than the RBI's medium-term target of 4% and was 6.3% in May.
  •  RBI has been trying to maintain a growth-supportive stance
  • It has retained an accommodative monetary stance that includes keeping benchmark interest rates substantially low and unchanged in response to the pandemic, 
  • MPC has warned repeatedly of upside risks to the inflation trajectory from international crude prices.
  • The MPC's prescribed:
  • To contain input cost pressures emanating from petrol and diesel prices, Excise duties, cess and taxes imposed by the Centre and States need to be adjusted in a coordinated manner
  •  Lower fuel prices would ease some pressure on retail inflation and allow the RBI to continue to keep the cost of borrowings lower which would ease interest rates and prompt investment and consumption.


Source: The Hindu

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