Indian state governments stand to lose as much as Rs 80,000 crore in tax revenues if the federal government eliminates excise duty on petrol and diesel to ease the financial distress of state-owned oil marketing companies, according to a new report by SBI Research.
The warning comes as policymakers weigh options to plug deepening losses at oil marketing companies, which are haemorrhaging roughly Rs 1,000 crore per day, or approximately Rs 3.6 lakh crore annually, because retail fuel prices have remained unchanged even as global crude costs have climbed.
The Centre last week raised retail fuel prices by Rs 3 per litre, a move SBI Research estimates will provide OMCs relief of around Rs 52,700 crore, covering only 15 per cent of their expected total losses in FY27.
With the Rs 3 hike falling well short of bridging the gap, attention has turned to whether the federal government might go further and slash excise duties. The Centre already reduced excise duty on petrol and diesel by Rs 10 per litre earlier in the year, a concession that cost the federal exchequer an estimated Rs 1.1 lakh crore in forgone revenue.
If excise duty is to be eliminated, petrol currently attracts a rate of 11.9 per cent and diesel 7.8 per cent, the federal government would forfeit a further Rs 1.9 lakh crore in revenues, equivalent to 0.5 per cent of gross domestic product, the report said. That would bring the Centre's total revenue sacrifice from excise cuts in the current fiscal year to Rs 3 lakh crore.
However, the collateral damage to state finances is the figure that is drawing fresh scrutiny. States levy a value-added tax on petroleum products on top of the federal excise duty. If the Centre's excise is reduced to zero, the base on which states calculate their VAT shrinks considerably.
SBI Research estimates that under an assumed FY27 scenario of Brent crude at USD 100 per barrel and an exchange rate of Rs 93 to the dollar, state revenues from VAT on petrol and diesel would fall to Rs 2.5 lakh crore, compared with Rs 3.3 lakh crore collected in FY26. That implies a revenue loss to states of Rs 80,000 crore at unchanged consumption levels. Higher oil prices are projected to provide states a partial offset of around Rs 30,000 crore, leaving a net adverse impact of approximately Rs 50,000 crore on state finances.
"The states will also lose Rs 80,000 crore," the report noted plainly, underscoring that any federal excise relief designed to help OMCs would carry a high fiscal cost that extends well beyond New Delhi's own balance sheet.
Even combining the Rs 3 per litre retail hike with a full elimination of central excise duty, OMC losses would be covered only to the extent of 68 per cent, the research found, meaning a substantial funding gap would persist regardless.
SBI Research also cautioned that the rupee's continued weakness poses an independent threat to any fiscal relief extended to OMCs. Assuming an FY27 average exchange rate of Rs 94 per USD and crude at USD 106 per barrel, even an additional depreciation of Rs 2 in the rupee would raise the landed import cost of crude sufficiently to entirely offset the gains OMCs have received from the recent retail price hike. |
