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Why Indians will continue to pay high oil prices despite lower global rates 

Consumers pay more than 100% tax – central and state levies combined – on petrol and diesel.

india Updated: Sep 22, 2017 18:16 IST
Suchetana Ray
Suchetana Ray
Hindustan Times, New Delhi
Fuel prices,Petro products,BJP
Authorities check a fuel station. Petroleum minister Dharmendra Pradhan has suggested that petroleum products be brought under GST for uniform tax mechanism across India.(Sanjeev Verma/HT File Photo)

Fuel prices in India are at a three-year high, although global crude rates halved over the same period, leaving many in the country to wonder why they must continue to pay more for petrol and diesel.

The central government says that because states earn more in taxes on petrol and diesel, they should cut fuel prices. The ruling BJP even sent out tweets with a breakup of the levies on petrol in Delhi, showing that the state earned almost double of what the Centre did from fuel prices.

A closer look, however, shows that this is not true.

For example, the price breakup of petrol in Delhi and the share of taxes between the Centre and states look like this:

— Cost of per barrel of petrol and freight charges (as on 14 Sept): $65.48/bbl

— Average exchange rate: $/Rs64.08

— Price paid by oil companies to refineries: Rs 26.65/Ltr

— Price charged to dealers (by oil companies): Rs 30.70/Ltr

Add to this:

• Excise Duty: Rs 21.48/Ltr

• Dealer Commission: Rs 3.24/Ltr

• VAT (including VAT on dealer commission) applicable for Delhi @ 27%: Rs 14.96/Ltr

Retail Selling Price in Delhi – Rs 70.39/Ltr

Now, let’s take a look at the share of the Centre and the state of Delhi in the levies on petrol.

The excise duty of ₹21.48 goes to the Centre. States get the proceeds from VAT and cesses. In the case of Delhi (which does not charge any cess), it amounts to Rs 14.96.

In addition to VAT, Delhi would also get 42% of the basic excise duty from the Centre as part of a formula on sharing of taxes between the Centre and states under the 14th finance commission.

This is where the BJP’s tweet goes wrong. It assumes that states receive 42% of the total excise duty of Rs 21.48.

The excise duty has three components: An additional duty (Rs 6), a special additional duty on excise (Rs 7) and a basic excise duty (Rs 8.48), adding up to Rs 21.48.

States receive 42% of only the basic excise duty from the Centre.

In the case of Delhi, it gets VAT (Rs 14.96) and 42% of the basic excise duty (Rs 3.56), taking the state’s total earnings to Rs 18.52 per litre of petrol sold. The Centre’s share is Rs 17.92.

At a time of when subdued tax collections and disruptions from demonetisation and GST have slowed down economic growth, the central government would find it challenging to cut the duty on petrol and diesel.

Excise duty on petro products account for 50-55% of the total excise collection by the Centre.

“The government has an oil-revenue dependence so taxes cannot be reduced. And even for the state revenue, oil and alcohol are the mainstay. There also the problem the trade imbalance. Oil accounts for 60% of our imports and this causes the trade imbalance. If duties on oil are to be reduced then by the simple logic of economics, consumption will go up increasing oil imports. So the states and the centre are really caught in a bind,” said noted economist, Mohan Guruswamy.

Indeed, states too are in a Catch-22 situation. Finances in most states are dire, and a cut in excise duty on fuel would reduce their share from the central pool.

The Centre can hope for either of these two to happen: International crude prices soften in the coming days or the festive season spending boost indirect tax collections, giving the government some elbow-room to reduce the duty on petro products.

But with output falling from OPEC, the bloc of oil producing countries, for the first time in five months and demand for oil strengthening, international crude prices may not soften in the near term.

“Initial hiccups in the first few months of GST implementation is bound to happen, making it impossible for the government to take chances with duty cuts. But the government should also maintain a fine balance between global crude prices and domestic prices of petrol and diesel, without short-term fixation on revenue collection,” said Abhishek Rastogi, partner, Khaitan & Co.