Falling crude prices eats into Centre’s revenue

Mumbai: Contrary to current thinking, falling crude prices that are supposed to reduce the subsidy burden, reduce fiscal deficit and add to profits of oil companies, have in reality eaten into government’s revenue collection and could add to the challenge of the government meeting its fiscal deficit target. This explains why the government on Tuesday raised the excise duty on petrol and diesel thereby depriving the consumers of the full pass-through of lower crude prices to retail prices.

A detailed report by Dhananjay Sinha, head, institutional research, Emkay Global Financial Services Ltd says the windfall expected from the  35 per cent year- to- date, fall in crude prices to $71 per barrel, and the fall in non-oil commodity prices, is not likely to happen.This is evident, Mr Sinha said, in government’s meagre indirect tax collection in the first seven months of FY15.

The gross receipts grew by a mere 4.8 per cent YOY, less than half of 12.8 per cent a year ago.The net tax collection for GOI at 3.5 per cent is a bleak outcome when compared against the full year target of 17 per cent for FY15 budget estimates. Explaining the details, the report says a decline in crude price will dec-rease oil subsidy which is 0.7 per cent of GDP and therefore the revenue ex-penditure of the government.  But it will reduce tax collections of both the Centre and the state governments.

The oil, sector contributes nearly 44 per cent  to the Centre’s indirect tax collection and 30 per cent to the states sales tax collection. In FY14, the total contribution of the oil and gas sector to the Centre and the state governments by way indirect tax collection was Rs 2,42,550 crore while the subsidy was a mere Rs 63,430 crore. The combined government revenue and expenditure and PSU profits from the petroleum sector was Rs 2,97,630 crore.  

“It will be safe to conclude that the sharp 35 per cent decline in crude oil prices will also have adverse fiscal implications by way of loss of tax revenue and dividend pay outs by oil PSUs which together will outweigh reduction in oil subsidy due to lower crude prices,” says Mr Sinha. In the case of non-oil commodities it is the same story of declining tax collection.