Missing: A Coherent Narrative On What Government Is Doing With Petro-Tax Bounties

The political backlash faced by the government for collecting oodles of money from taxing petro-fuels – resulting in ever-rising pump prices – is a pointer to the reality that even good taxes need to be properly explained to the people. It does not make sense for governments to presume that since these taxes are usually paid by the better off, one need not bother explaining why they are so high in the first place. It is no surprise that Tourism Minister K J Alphons’ suggestion, that those owning cars and bikes are not starving and hence can pay more, got shouted down as insensitive.

The problem is with a few mindsets in government: one is that if you are better off, you should not complain about taxes. Worse, there is the assumption that government can do whatever it wants with taxes collected. No one has a right to question where the money goes. Some vague mention about using the collections for building infrastructure are believed to be good enough to explain high petroleum taxes. A third mindset relates to beneficiaries of welfare. Since it is presumed that government is doing them a favour, they too should shut up.

This attitude simply will not wash in a democracy. Both taxpayers and welfare beneficiaries are citizens, and just because one is rich and the other ought to be grateful for what is thrown in her plate, it does not make government unanswerable to both constituencies.

If, tomorrow, the political opposition manages to make enough of a fuss about high petrol and diesel prices to force the government to roll back taxes, the National Democratic Alliance government will have only itself to blame.

To stay in control of the narrative, the Prime Minister cannot leave it to the Petroleum Minister or the Finance Minister to handle this communication. The rationale for high taxes must come from him, since he is the politician in charge of the country’s direction. Before the 2014 election, he promised to be the country’s “chowkidar”, promising to stand guard over the treasury, so that no one steals from it. But wastage is no different from stealing. He now needs to tell us whether the money collected from taxes and spent on our behalf is being spent wisely.

In 2016-17, Centre and states collected Rs 4.63 lakh crore in terms of customs, excise and value-added tax from the petroleum sector – which means consumers paid for this. Of this amount, Rs 273,502 crore went to the Centre, and Rs 189,587 crore to states.

But states are also entitled to 42 per cent of central tax collections – which means 42 per cent of Rs 273,502 crore went to them. Add the amounts states got, and it is obvious that they got around Rs 1.04 lakh crore as their share of central collections – which adds up to a tidy Rs 304,457 crore among all states. Two-thirds of the money collected from the petroleum sector went to states.

So, the first political point that needs making is that the bulk of the money goes to states. This explains why when national level politicians are screaming blue murder, no state-level politician has even offered a squeak by way of explanation. The real explanations need to come from states.

The second point is that petroleum taxes are not within the ambit of the goods and services tax (GST). This is unlikely to change soon. It is a fair bet that states, which have already lost a degree of revenue autonomy by agreeing to GST, are not going to let go of petroleum in a hurry if they can help it. So, muttering about putting petroleum in GST is not going to assuage the public.

But the most important bit of communication that the Narendra Modi government needs to make is explain where the taxes it collected went.

Currently, all tax collections and revenues go into a big pot called the Consolidated Fund of India. While one can get a broad idea about where the money is to go, it is difficult to assert that the bulk of the Rs 4.63 lakh crore collected from petro-products has gone to fund sensible expenditure, including infrastructure, welfare schemes for the poor, defence, etc. After devolution to states, the biggest two items of expenditure are 18 per cent interest, and 13 per cent “other expenditure”. Money spent on subsidies, central and centrally-sponsored schemes come lower down in the pecking order.

The villains are clearly “other expenditure” – which will include the high cost of administration – and the cost of servicing the borrowings required to maintain other kinds of spending.

Therefore, it is difficult for government to claim virtuous spending of the high taxes it collects from petro-fuels.

Is there a way out?

Yes, when particular sectors are taxed way above others for good reason, the excess taxes must be put to specific uses, and this must be shown separately.

Let’s assume that it is fair to collect Rs 250,000 crore from petro-fuel taxes between Centre and states. Any tax collection above this level should be sequestered and used for specific purposes: for example, one portion of the tax can be accumulated as a corpus for subsidising liquefied petroleum gas in case global prices rise too fast; another portion of the surplus can be earmarked for investment in road and railway infrastructure. A third portion could be subsidies offered to renewable sources of energy, so that oil bounties are used to move towards cleaner energy.

It is only when money collected is shown to have been spent wisely that the citizen will acquiesce in its collection. No one minds paying more if the money is for a good cause.

The Modi government needs to create a new narrative around how high taxes pay for sensible policies instead of just telling the better off to like it or lump it. With less than 20 months to go for the next general elections, and many state assembly elections in-between, the government cannot fail to build a credible narrative on taxes.