Opinion | Oil product levies should be like sin taxes on tobacco and liquor

It is a pity that opposition voices have arisen asking for tax reductions that could destroy the only major source of government revenues during a year in which covid-19 has devastated the Indian economy, which is probably in a full-blown recession at this juncture. Complaints have been raised against the currently high levies on petrol and diesel at a time when international crude prices are relatively benign.

The term “extortion” has been used. One need not object to this word, given how heavily petroleum products are taxed in India. But the policy is indeed rational, as we shall see. In 2019-20, the Centre and states together collected ₹5.5 trillion from the petroleum sector through product taxes, income-tax and dividends. According to the Petroleum Products Analysis Cell, ₹3.34 trillion of this went to the Centre and the rest to states. But since states get 42% of all central revenue collections, effectively states received more than ₹3.4 trillion from the petroleum sector. This reliable source of revenue, reliant on inelastic demand, is the reason why states do not want to bring petroleum products under the goods and services tax.