Increase in Excise Duty – A boon or bane?

The news that has been doing rounds from this morning is that the Government has increased the excise duty by Rs. 3.

This has led to many news channels claiming in their headlines that the petrol price will increase. This has come as a rude shock to the citizens who already are reeling under tremendous pressure from Corona Virus. Many Businesses have temporarily closed shops and other business as a precaution in view of COVD’19. In addition, the Government has cancelled all tourist visas till April 15. Many sports events have been cancelled. This altogether has led to a recession kind of gloom. At this juncture, does it make sense for the government to increase the excise duty?

Let me help you get the facts right. As a pre requisite, let us understand what Excise Duty is. Excise duty in nutshell can be explained as a tax levied on the product, in this case Petrol/Diesel. It is like the tax that you pay on all products. This tax goes to the government as income, which then is spent by the Government for the various welfare schemes. Now then why has the government increased the Excise Duty now when there is a pale of gloom all around?

The petrol prices globally have reduced over 30% during the last two weeks. This has led to a larger feeling among common citizens that the price of petrol should fall drastically in line. However, in reality this does not happen immediately. This is because, the petrol and diesel being sold now is the inventory that was bought by the dealers when the prices were higher. No business would want to sell their stock in loss. However, there has been a very organic reduction of the commodities up to Rs. 1.50/- liter. This is expected to fall further over a period of two weeks. This is known as the lag effect.

In this scenario, an increase in excise duty is not going to result in an increase in petrol or diesel prices from the current prices. All that it does is, that if the OEMs’ reduce the price in lieu of the 30% drop in the market, it will directly not result in 30% effect. So, for example if there is a reduction of say Rs. 10/- from the current price, the new price will be for example in Chennai be Rs. 62.50/-. The increase in excise duty will increase in the price. The new price will be Rs. 65.50/-.

The difference of Rs. 3 is the result of increase in excise duty. So in effect though there is an increase in new price from what actually it could have been, there is an overall reduction from the current prices. This will help in reducing the inflation and also save billions of dollars for our country because we mainly import the petroleum products.

Ideally this is a win-win situation for both the citizens and the government as citizens will be shelling out lesser for Petrol/Diesel and the Government will have additional revenue to plan the expenses.

Now would this be a boon or bane for all needs to be seen on how things pan out in the near future.

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