Pricing regime of Fuel
- May 3, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Pricing regime of Fuel
Section: Fiscal policy
It is quite complicated that the final retail price of petrol and diesel has multiple components.
Components of Fuel prices:
- The base price, including the freight, accounts for 56 per cent of the final selling price for petrol and 60 per cent for diesel.
- The Centre charges excise duty on the base price accounting for 26 per cent and 23 percent of the final price of petrol and diesel, respectively.
- The dealer’s commission amounts to another 4 and 3 percent of the selling price of the two petroleum products.
- The States levy value-added tax (VAT) on the cost of petrol and diesel, including excise duty and dealer’s commission.
As of now LPG, kerosene, naphtha, furnace oil, and light diesel oil are under GST.
Five other petroleum products viz. crude oil, high speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel lie outside the GST.
At present, Centre levies the excise duty on crude oil which is a specific tax i.e. charged on the number of units sold irrespective of the prices. The excise duty
charged by the Centre, comprises of four elements —
- Basic excise duty,
- Special excise duty,
- Additional excise duty (road and infrastructure cess) and
- Agriculture and infrastructure development cess.
The Centre has to share only the amount collected under the basic excise duty with States as other components are either cesses or bucketed under surcharge.
The basic excise duty accounts for just 4.2 per cent of the amount collected by the Centre as fuel taxes. Once 41 per cent of the basic excise duty is shared with the States, the Centre retains over 98 per cent of the tax collected on petrol and diesel.
Why are States against Centre levying cess on fuel?
Cess is a tax charged over the basic tax liability, and it is levied for a particular purpose, such as education cess, infrastructure development cess, etc.More important, since the cess collected has to be spent only for a specific purpose, the Centre need not share the collection with States.
The States levy value-added tax (VAT) on the cost of petrol and diesel, including excise duty and dealer’s commission petrol. Since VAT is an ad-valorem tax, it will go up and down with the market price of the fuel. States have been given a free hand in structuring and taxing fuel.
- Many States/UTs such as Arunachal Pradesh, Delhi, Odisha and Telangana charge just VAT at a certain rate applied to the cost of the petrol.
- Others choose a hybrid model wherein they charge a lower VAT on the fuel and apply a flat charge per litre of petrol and diesel. States like-Tamil Nadu, Maharashtra, Andhra Pradesh and others have this hybrid model.
- The other States and UTs apply other innovative charges, including road development cess, employment cess, pollution surcharge etc.