Retail prices of petrol and diesel need to soften to provide much-needed relief to consumer
- April 2, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Retail prices of petrol and diesel need to soften to provide much-needed relief to consumer
Subject: Economy
Section: Fiscal policy
Context: In the past few days, retail prices of petrol and diesel have consistently increased to all-time high levels.
Concept:
- Public sector Oil Marketing Companies (OMCs) revise the retail prices of petrol and diesel in India on a daily basis, according to changes in the price of global crude oil.
- The price charged to dealers includes the base price set by OMCs and the freight price. As on October 16, 2021, the price charged to dealers makes up 42% of the retail price in the case of petrol, and 49% of the retail price in the case of diesel
- The break-up of retail prices of petrol and diesel in Delhi shows that around 54% of the retail price of petrol comprises central and states taxes. In the case of diesel, this is close to 49%.
- The central government taxes the production of petroleum products, while states tax their sale. The central government levies an excise duty of Rs 32.9 per litre on petrol and Rs 31.8 per litre on diesel. These make up 31% and 34% of the current retail prices of petrol and diesel, respectively.
- While excise duty rates are uniform across the country, states levy sales tax/ Value Added Tax (VAT) which varies across states. For instance, Odisha levies 32% VAT on petrol, while Uttar Pradesh levies 26.8% VAT or Rs 18.74 per litre, whichever is higher.
International crude prices and Petrol prices in India
India’s dependence on imports for consumption of petroleum products has increased over the years. For instance, in 1998-99, net imports of petroleum products were 69% of the total consumption, which increased to around 95% in 2020-21. Because of a large share of imports in the domestic consumption, any change in the global price of crude oil has a significant impact on the domestic prices of petroleum products.
Retail prices in India compared to global crude oil price
- Between June 2014 and October 2018, the retail selling prices did not adhere to change in global crude oil prices. The global prices fell sharply between June 2014 and January 2016, and then subsequently increased between February 2016 and October 2018. However, the retail selling prices remained stable during the entire period. This disparity in the change in global and Indian retail prices was because of the subsequent changes in taxes. For instance, central taxes were increased by Rs 11 and 13 between June 2014and January 2016 on petrol and diesel respectively. Subsequently, taxes were decreased by four rupees between February 2016 and October 2018 for petrol and diesel. Similarly, during January-April 2020, following a sharp decline of 69% in the global crude oil prices, the central government increased the excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively in May 2020.
Share of states in excise duty has decreased over the years
- Though central taxes (such as excise duty) are levied by the centre, it has only 59% of the revenue from these taxes. The remaining 41% of the revenue is required to be devolved to the state governments as per the recommendations of the 15thFinance Commission. These devolved taxes are un-tied in nature, states can spend them according to their own discretion.
- The excise duty levied on petrol and diesel consists of two broad components: (i) tax component (i.e., basic excise duty), and (ii) cess and surcharge component.
- The revenue generated from the tax component is devolved to states. Revenue generated by the centre from any cess or surcharge is not devolved to states. Currently, the Agriculture Infrastructure and Development Cess, and the Road and Infrastructure Cess are levied on the sale of petrol and diesel in addition to the surcharge.
In the Union Budget 2021-22, the Agriculture Infrastructure and Development cess on petrol and diesel was announced at Rs 2.5 per litre and Rs 4 per litre, respectively.
Over the last four years, the share of tax component in the excise duty has decreased by 40% in petrol and 59% in diesel. At present, majority of the excise duty levied on petrol (96%) and diesel (94%) is in the form of cess and surcharge, due to which it is entirely under the centre’s share
Will bringing petrol under GST help?
Taxing policy:
- 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.
- Article 279 A(5) of the Constitution prescribes that the Goods and Service Tax Council shall recommend the date on which GST is to be levied on petroleum and other related fuel.
- At present, Centre levies the excise duty on crude oil which is a specific tax e. charged on the number of units sold irrespective of the prices.
- The state taxes on petroleum products are largely ‘ad valorem’ taxes — i.e. tax is based on the value of the product such as 27 per cent VAT on petrol and 21.43 per cent on diesel by the Tamil Nadu Government. Thus, when the price of diesel is revised by Rs 1 by the oil marketing companies, VAT on diesel gets revised upwards automatically. Similarly, customs duty on imports and road development cess are also levied on ad valorem basis. This results in a cascading effect on any increase in the basic price, thereby fuelling inflation.
- However, in order to protect against sudden drop in revenue due to falling international oil prices, some states have both specific and ad valorem rates. Specific tax triggered only after international price drops. For eg- West Bengal has a sales rate on petrol at 25% or ₹7.70 per litre, whichever is higher. UP, Uttarakhand, Assam, Himachal Pradesh, Jharkhand are some of the other states to follow this approach.
Will inclusion in GST help?
- Even if petrol and diesel are included under GST, prices are unlikely to fall. This is because of the GST principle of keeping rates close to the earlier tax rates.
- The international trend also suggests that if petrol and diesel are included in GST, states levy additional taxes to prop up their revenue.
- Since, the state governments levy value-added tax (VAT) on the fuel price inclusive of central excise duties, not the base price, leading to double taxation and further price amplification. GST may not stop prices from moving up, but will at least ensure no cascading effects of taxes like double taxation.
Prelims Factly:
India is the 3rd largest oil consumer in the world. India imports more than 80% of its requirement of crude and of that more than 60% of its needs from OPEC.
According to the Petroleum Planning and Analysis Cell (PPAC), India’s major sources of crude oil are Iraq, Saudi Arabia, the UAE, Nigeria and the US, with Russia accounting for less than one percent of the total imports in 2021-22 (till January)