Ruchi Agrawal Moneycontrol Research
With international crude prices on the rise, big oil importers like India are feeling the heat. But consumers in India have another reason to feel aggrieved. Thanks to an increase in fuel taxes, they did not benefit when crude prices were sliding. And now that crude prices are rising, they are being forced to shell out more.
Faced with public anger, the oil ministry asked state-owned oil marketing firms to keep their profit margins in check. But that drew more criticism as the government was seen to be protecting its own revenues and also interfering with the pricing policy of oil companies.
A section of the Street argues that petroleum products (a key input for almost all industries), too, should be brought under the ambit of GST. We examine the feasibility of the same in the wake of the raging debate.
Explainer: How Daily Revision Of Petrol, Diesel Prices Works
Price trends
Retail prices of petrol and diesel are averaging a three-year high at Rs 74 per litre and Rs 62 per litre, respectively. Over the same period, international crude prices have more than halved from around USD 110 per barrel to USD 50 per barrel. This effectively means Indian consumers are paying almost the same for petrol and diesel when crude was at USD 110 per barrel. However, consumption has been steadily rising despite high prices.
Neither consumers nor oil marketing companies have benefited from softer crude prices The marketing margins of oil marketing companies have remained between Rs 2 and Rs 3 per litre.
The taxation conundrum
Retail fuel prices have remained inflated due to sharp increase in taxes, particularly excise duty.
Over the years, before crude prices collapsed, the retail consumer was habituated to paying close to Rs 60 per litre for petrol. So when the price fell to Rs 50 per litre as crude prices collapsed, he was delighted, failing to noticing the steep increase in the taxes during this period.
The recent increase in crude prices in global markets from USD 44.2 to USD 57.3 per barrel has pushed the retail fuel prices in India to around Rs 74 per litre. The prices are now touching a point where it is pinching the retail consumer’s pocket.
Current taxation
Currently, two taxes, VAT and excise duty, are imposed on petrol and diesel. The VAT component varies across cities and the percentage is decided by the state government. However, excise duty in imposed by the central government and is fixed across states. Nearly half the current price of petrol and diesel is attributable to taxes imposed by the central and the state government. This means the cumulative rate of current taxes (VAT+excise) amounts to a whopping 79.5 percent on diesel and 107.3 percent on petrol.
There has been a rapid rise in excise duty component over the last three years since global crude prices started falling. Excise duty has quadrupled on diesel and nearly tripled on petrol in the last three years.
Why a need for GST?
Implementation of GST on petrol and diesel prices would bring about pricing parity across states. Petroleum products are key inputs for many industries and since they are outside the ambit of GST, the user industries cannot claim input tax credit (ITC) on a key raw material.
Even oil marketing companies (OMC) are not able to avail of this benefit of ITC and this significantly inflates their tax burden. An inclusion of petrol and diesel in GST would enable OMCs to avail the ITC and would lower their tax liability.
The question of feasibility
At present, cumulative tax rate on petrol and diesel stands around 107 and 79 percent, which are much above the highest GST slab of 28 percent. This raises questions about feasibility of petrol and diesel under GST.
It is unlikely that the government would want to tinker with the recently implemented GST structure and introduce any slab higher than 28 percent. A straight forward implementation of GST at 28 percent on fuel would result in a deep hit on the government revenue which it cannot afford at this point. Economic growth has been badly hit by demonetisation and the GST roll-out, and the government is considering a fiscal stimulus to kickstart the economy.
Another possibility is to include fuel under a demerit category (or maybe introduce a new category name) and levy a cess to compensate for the lost revenue (currently Delhi government charges 0.25 percent as pollution cess on diesel).
This too has its own set of problems. Currently demerit goods, luxury cars etc. attract a cess. Petrol and diesel, on the other hand, are basic needs for retail and commercial consumers. Given the huge difference between the maximum GST rates and current taxation rate on petrol and diesel, the government would require a cess of nearly 50-75 percent to make up for lost revenue. Without such a cess, the government will have to take a huge hit on its revenues.
Till such time the government manages to find an alternative source of revenue, it will continue to play ‘heads I win, tails you lose’ with the consumer.
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