Fuel Prices: Taxing The Poor, Subsidizing The Rich

petrol diesel

Since the conclusion of recently-held assembly elections in five states, the fuel prices have undergone nine hikes in the last ten days, pushing the cost of petrol, diesel, and LPG to a record high. These prices were last revised in the month of November 2021, when the price of petrol had reached ₹100 per litre. Beyond the obvious concern of the government abusing its power for the sake of elections, and promptly abandoning its voters once the elections are over, the hike in fuel prices has again pushed the poor and middle class towards incredible distress.

Yet again and almost predictably, the Union Minister of Finance Nirmala Sitharaman blamed the hike in fuel prices to the oil bonds issued during the previous government [1]. A few months ago, Union Minister of Petroleum Hardeep Singh Puri claimed that the price of fuel is high due to the taxes imposed by the states, and the fuel taxes are being used to fund India’s LPG subsidy program [2]. Last year, the erstwhile Petroleum Minister, Dharmendra Pradhan had similarly claimed that the fuel tax is being used to finance India’s vaccination program and other welfare schemes [3].

While a ruling party is justified to defend its policies, it is important to investigate the truth behind these claims. For instance, contrary to the claims of the Finance Minister, during the last eight years, the Modi Government has only repaid ₹ 3,500 crore worth of oil bonds, while the total excise collection from petroleum products was over 3,00,000 crore in 2020-21 alone [4]. The direct subsidy paid on LPG was stopped in May 2020, and the bulk (almost two-third) of the tax collection from fuel goes to the Union Government, not the states. The claim of high crude oil prices behind the reason for the hikes is also deceitful. In the eight years of the Modi government, while the cost of crude oil fell significantly, the retail price of petrol still continued to increase [5]. It is noteworthy that taxes constitute the bulk of fuel price in India, with nearly half of the cost of petrol going as taxes [6].

But more important than these outright lies, it is essential to investigate the larger cause and impact of the hike in fuel prices — who bears the burden of these hikes, who benefits from the tax collected, and whether it really helps in funding the welfare programs.

In the year 2020-21, when the entire nation was reeling under the COVID-induced economic distress, the prices of petrol, diesel, and LPG underwent massive hikes. Within the span of just one year, the prices of petrol and diesel increased by over 35% crossing ₹100 per litre, while price of LPG increased by over 50% reaching close to ₹1000 per cylinder in many states.

The increase in fuel prices not only adds to the cost of fuel for the private transportation like cars and motorcycles, but also increases the fares of public transportation including bus, taxi, and auto-rickshaw. It also adds to the cost of food production, where fuel is used to run tractors and irrigation pumps in agricultural farms; to the cost of manufacturing, where fuel is used to run the machines in the industries; to the transportation costs, where fuel is used to run trucks and lorries for freight transportation. The increase in fuel prices has a cascading effect on the overall inflation, adding to the costs at every step of the supply chain, and increases the cost of all final goods and services.

In addition to the increase in prices of the fuel, the Modi government has also abolished the subsidy paid on the LPG. Since May 2020, the meagre subsidy paid on LPG has been completely stopped. It is important to remember, that during this time, a large population had lost its savings and livelihoods to the COVID-induced economic distress, and the need for subsidy was more acute. In the financial year 2022, the Modi government is expected to save nearly ₹36,000 crore on the subsidy paid on LPG. Appallingly, the government’s own assessment had revealed that demand of LPG is highly inelastic, and people would pay even ₹1000 for an LPG cylinder [7]. This is hardly a surprise, since most households cannot make a budget cut on cooking gas, except under extremely dire circumstances. The fact that people would pay an extremely exorbitant amount, does not necessarily imply their ability to pay. With the hike in LPG prices, and the withdrawal of subsidy, it is likely that poor households had to make budget cuts on their other necessities, like education or healthcare. A large number of rural households, that could not afford the increased price of LPG, have simply stopped refilling the cylinder and went back to using firewood [8] [9].

The increase in fuel prices affects every person, however it hurts the poor the most, who have to spend a larger portion of their incomes to cover this inflation. The fuel tax and other indirect taxes are a form of regressive taxes. A regressive tax is a tax applied at a uniform rate regardless of income or expenditure. In a regressive taxation, a poor person has to pay a larger tax in proportion to their income. This differs from progressive taxes, like the income tax, the corporate tax, or the wealth tax, where the rate of taxation increases with the amount to be taxed. Under a progressive tax, a rich person pays a larger tax in proportion to their income. While a progressive tax may help in creating welfare and equality, regressive taxes increases inequality. A regressive tax disproportionately hurts the poor. And the claim of imposing such a tax for welfare programs is absurd.

In the recent years, Modi government has significantly reduced the direct taxes, and increased the indirect taxes [10]. In 2015, the Modi government abolished the wealth tax. In 2019, the corporate tax was reduced from 30% to 22%. The abolition of wealth tax cost nearly ₹950 crore to the exchequer, while the reduction in corporate tax led to a loss of more than ₹1,00,000 crore to the government’s receipts in FY20 [11] [12]. Consequently, in 2020-21 the total collection from corporate tax fell below that of income tax [13]. This led to enormous profits for the rich. During the COVID pandemic, the profit-to-GDP ratio of the corporations soared to a 10-year-high [14], and the net profit of listed companies increased by 57%. The number of billionaires increased by 40 [15], and their wealth increased by 35% [16].

The fall in tax collection from the rich, was made up by increasing the taxes on the poor. While the share of direct taxes in the government’s receipts has decreased, the share of indirect taxes, including the excise duty from petroleum products and the GST, has increased [17] [18]. In the financial year 2021, the Union Government’s excise collection from petroleum products increased 74% more than the previous fiscal [19]. Between April and September 2021, the excise collection from petroleum products was 33% more compared to the same time frame of the previous year, and 79% more than the pre-COVID levels of 2019 [20].

It is important to note that — particularly owing to the Modi government’s economic policies — the COVID-induced economic distress had disproportionately affected the poor. In fact, while the rich gained incredible wealth during the pandemic, the poor lost their jobs, livelihoods, and savings. During the COVID-19 pandemic, an additional 230 million people fell below the poverty line [21]. Over 70% of Indians downgraded their diet, , and hunger and malnutrition reached alarming levels [22]. The household savings were depleted, and the household debt increased by 4.25 lakh crore [23]. Millions lost their jobs.

While, the poor and middle class of the country lost their livelihood and their savings, the government kept on increasing their tax burden, and giving unimaginable concessions to the rich. In effect, through its regressive taxation, the Modi government has shifted the burden of tax from the rich to the poor.

* Footnotes

[1] finance: Finance minister blames Putin’s war, UPA oil bonds for fuel price hike | India News – Times of India https://timesofindia.indiatimes.com/india/finance-minister-blames-putins-war-upa-oil-bonds-for-fuel-price-hike/articleshow/90527587.cms

[2] Petrol, diesel rates: Hardeep Singh Puri defends tax rates, says they fund Covid-19 vaccines https://scroll.in/latest/1008402/taxes-on-fuel-fund-covid-19-vaccines-free-meals-says-union-minister-hardeep-singh-puri

[3] Fuel price hike pinching, but we are saving money for welfare schemes: Union minister | Delhi News – Times of India https://timesofindia.indiatimes.com/city/delhi/fuel-price-hike-pinching-but-we-are-saving-money-for-welfare-schemes-union-minister/articleshow/83493378.cms

[4] Petrol and Diesel Prices are High Due to Lower Corporate Taxes, Not Because of Oil Bonds | Vivek Kaul https://vivekkaul.com/2021/06/17/petrol-and-diesel-prices-are-high-due-to-lower-corporate-taxes-not-because-of-oil-bonds/

[5] Petrol and Diesel Prices https://prsindia.org/theprsblog/petrol-and-diesel-prices

[6] Explained: How Much Tax Is Collected In Each State For Petrol https://www.ndtv.com/india-news/explained-how-much-tax-is-collected-in-each-state-for-petrol-2838358

[7] LPG Subsidy: Centre plans new scheme for cooking gas cylinders? Here’s how consumers can benefit | Personal Finance News | Zee News https://zeenews.india.com/personal-finance/lpg-subsidy-centre-to-plan-new-scheme-for-cooking-gas-cylinders-here-s-how-consumers-can-benefit-2396382.html

[8] Seven price hikes in three months puts Modi government’s LPG cylinders out of reach of India’s poor https://scroll.in/article/988886/india-s-poor-were-struggling-to-refill-lpg-cylinders-now-with-record-price-hike-many-have-given-up

[9] Quiet decontrol of LPG: 2021-22 to bring the curtain down on budgetary fuel subsidy – The Financial Express https://www.financialexpress.com/economy/quiet-decontrol-of-lpg-2021-22-to-bring-the-curtain-down-on-budgetary-fuel-subsidy/2306710/

[10] Divide Widens as Centre Shies Away From Progressive Taxation | NewsClick https://www.newsclick.in/Rich-Richer-Poor-Turn-Poorer-Centre-Shies-Away-Progressive-Taxation Rich-Poor

[11] Data | Corporate tax cuts fail to spur investments, revenue loss higher than expected – The Hindu https://www.thehindu.com/data/data-corporate-tax-cuts-fail-to-spur-investments-revenue-loss-higher-than-expected/article31727026.ece

[12] Receipt Budget 2022-23 https://www.indiabudget.gov.in/doc/rec/allrec.pdf

[13] Income tax collections surpass corporation tax for the first time in 12 years https://www.livemint.com/economy/income-tax-collections-surpass-corporation-tax-for-the-first-time-in-12-years-11622534204406.html

[14] Corporate profit to GDP ratio hits 10-year high of 2.63% in FY21 | Business Standard News https://www.business-standard.com/article/companies/corporate-profit-to-gdp-ratio-hits-10-year-high-of-2-63-in-fy21-121053100041_1.html

[15] Inequality Kills: India Supplement 2022 https://www.oxfamindia.org/press-release/inequality-kills-india-supplement-2022

[16] Billionaire fortunes in India grew by Rs 2200 crore a day last year as poorest remained in debt https://www.oxfamindia.org/oxfam-davos-inequality-report-launch-public-good-private-wealth

[17] GST Has Increased India’s Reliance on Indirect Taxes, Hurting the Poor https://thewire.in/economy/gst-india-indirected-taxes-inequality

[18] The taxation policy of the Indian government has been problematic on two grounds https://indianexpress.com/article/opinion/columns/india-taxation-policy-fiscal-deficit-covid-impact-on-economy-indirect-tax-revenue-6549290/

[19] Excise collection from petrol, diesel up 88% at Rs 3 lakh crore on last year’s tax hike – Times of India https://timesofindia.indiatimes.com/business/india-business/excise-collection-from-petrol-diesel-up-88-at-rs-3-lakh-crore-on-last-years-tax-hike/articleshow/84562120.cms

[20] Excise collection 79% more than pre-Covid levels – The Hindu https://www.thehindu.com/business/Economy/excise-collection-79-more-than-pre-covid-levels/article37264134.ece

[21] Additional 230 Million Indians Fell Below Poverty Line Due to the Pandemic: Study https://thewire.in/economy/additional-230-million-indians-fell-below-poverty-line-due-to-the-pandemic-study

[22] Six-fold increase in people suffering famine-like conditions since pandemic began | Oxfam International https://www.oxfam.org/en/press-releases/six-fold-increase-people-suffering-famine-conditions-pandemic-began

[23] Desperate Indians Used Savings, Took Loans to Survive COVID-19 Pandemic | NewsClick https://www.newsclick.in/Desperate-Indians-Used-Savings-Took-Loans-Survive-COVID-19-Pandemic

Rishi Anand is a 29 year old activist, primarily associated with Swaraj Abhiyan. His interest is in workers and peasants struggle, social and economic justice movements, and environment protection. Ideologically, he is a socialist. He has been a part of 2019 CAA-NRC movement and the 2020-21 Farmers’ movement, among other movements in the past, and local movements in Bihar.


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