Petrol price rise and issue of tax

Petrol price rise and issue of tax

Subject: Economy

Context: Ratings agency ICRA recently postulated that the government had room to cut cess levies on retail prices of petrol and diesel, thereby easing prices. Lower fuel prices will likely help cool inflation levels, which are currently beyond the 6% upper limit specified by the Reserve Bank of India (RBI)

Concept:

• The agency projects aggregate revenue from such taxes on these two fuels to expand by about 13% in FY22 from the previous year.
• Tax paid on a litre of petrol, as of June this year, taxes accounted for close to 58% of the price of petrol in Delhi.
• Between May 2014 and June 2021, the Centre’s share of taxes on the retail price of petrol rose 216%, even though the base price of the fuel declined 24%.
• The current fuel prices reflect the higher cesses that have been imposed by the Centre since March 2020 and an increase in Value Added Tax (VAT) rates by more than three-fourths of the State governments.

Reason for high tax:

The Centre needs ₹20,000 crore in the current financial year to service the interest and principal related to special oil bonds issued to oil marketing companies (OMCs). These bonds are interest-bearing, having a fixed coupon rate and paid on a half-yearly basis. The annual interest due of around ₹10,000 crore has been provided for in the Budget.

MPC and Fuel prices

• The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB of RBI Act determines the policy interest rate required to achieve the inflation target.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent
• The RBI has been trying to maintain a growth-supportive stance by retaining an accommodative monetary stance that includes keeping benchmark interest rates substantially low and unchanged in response to the pandemic.
• Monetary policy committee (MPC) has been warning of upside risks to the inflation trajectory from international commodity prices, crude, logistics costs.

The MPC’s prescription

• Excise duties, cess and taxes imposed by the Centre and States need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices.
• Lower pump prices of the transport fuels would ease some pressure on retail inflation and thus allow the RBI a little more elbow room to continue to keep the cost of borrowings lower. This, in turn, could facilitate more demand for credit to both consume and invest in new business activity, spurring growth.