Tanking up on plenty

The taxes on oil products are the main source of government revenue. But the government’s imposition of ad valorem tax is responsible for inflation, writes Murad Ali Baig.

india Updated: Jul 14, 2010 23:21 IST

Most of the opposition parties while criticising the government for raising the price of diesel have been urging it to shift the cost burden on to petrol in the outdated belief that cars are the luxury toys of the elite. These critics do not understand that things have changed and that luxury cars today account for just 0.2 per cent of car buyers and that 78 per cent of India’s cars are some 11 million hatchbacks owned by a hard-working middle class who need small cars to get to work. Equally important is the fact that India today has some 80 million 2-wheelers that are almost entirely owned by tradesmen, contractors and lower income workers. These 90 million vehicles daily ferry over 150 million people and they do not need to be victimised because of an obsolete stereotype. Today they may not be considered very politically active but if they felt an injustice was being inflicted on them they could cause riots as has been the case in many countries like Egypt and Indonesia.

We are also being persuaded by a government that is shedding crocodile tears over the heavy burden that uncontrollable crude oil prices are putting upon the public sector oil companies. A close look at the facts shows that a barrel of crude contains 158 litres that at $40 (Rs 1840) a barrel in 2004 would have cost Rs 11.39 a litre. It now costs about $72 or Rs. 20.50 a litre. So the prices have now risen by just Rs 9.11 per litre. Though the government does not openly reveal it, the retail prices have more than doubled with the substantial addition of taxes.

The actual cost of petrol after refining and transport in Delhi is just Rs 24.79 that is virtually the same for diesel and kerosene as well. The retail price of petrol at Rs 51.66 contains customs duty of Rs 1.03, sales tax of Rs 7.75 and excise duty of Rs 18.08 totaling 51 per cent of the price the consumers pay. The taxes on diesel are lower but they too carry a big tax element. Only kerosene and LPG are subsidised. The government is also obfuscating about the losses supposedly suffered by the oil companies as the profits and reserves of ONGC, Indian Oil and the others are sinfully high.

The taxes on oil products are the main source of government revenue but the impact is unjustly multiplied because these are levied on a ‘ad valorem’ (per cent) basis and increase exponentially with every increase in crude oil costs. The government can secure the tax income it needs with tax at a flat rate per kilolitre and its revenues would continue to grow with the growth in fuel consumption.

Diesel for trucks accounts for only one third of their operating costs that, in turn, averages about 5 per cent of the costs of the soap, toiletries and foodstuffs that we buy. Thus the total cost of diesel is just 1.75 per cent of the cost of goods and is not as inflationary as many seem to believe. The defenders of low diesel prices are also in a time warp when they criticise luxury cars that run on diesel not realising that diesel technology has changed so much that many buyers in Europe and US buy diesel cars despite the fact that diesel costs as much as petrol. New diesel engines are now more fuel-efficient than petrol engines and are no longer the sluggish, noisy and polluting vehicles of earlier times. They do not need subsidised prices for fuel nor do the gensets that provide standby power to all the cinemas, malls, offices, hotels, etc, that are estimated to amount to about 10 per cent of India’s diesel consumption.

Kerosene actually costs almost the same as petrol or diesel but the huge subsidy encourages massive adulteration that is officially estimated at 40 per cent. Millions of adulterators spend Rs 120 to buy 10 litres and can earn a profit of Rs 400 when they mix it with petrol. Even diesel is adulterated to cause pollution as well as damage to engines. Subsidised kerosene and diesel may only be considered in forest districts. The adulteration would be limited and it might help save the forests. Removing subsidies on the prices of fuels will otherwise impact the actual users of kerosene for cooking and lighting but they will not be inflationary. It is the government’s huge ‘ad valorem’ taxes that are inflationary.

Murad Ali Baig is a Delhi-based automobile analyst

The views expressed by the author are personal

First Published: Jul 14, 2010 23:19 IST