Central levies to blame for high fuel prices

In the post independence period, petroleum prices have been influenced by two major considerations: One, petroleum is a basic intermediate good whose price would have significant implications for prices of other goods and therefore should be relatively stable, insulated from fluctuations of international crude oil prices. Two, its inelastic demand nature made it an ideal commodity for indirect tax.

The first led to a system of administered prices, operated through a special oil pool account funded by the surplus of ONGC and the refining companies, as well as direct government subsidies. The second was responsible for high Central excise duty and high sales tax rates at the retail level, levied by the States. Relatively high tax on petroleum products is a universal feature, but in India it is much higher than in most countries.

With the rising trend in international crude oil prices the subsidy burden of the oil pool account began to mount; it was considered from a prudent public finance perspective that the oil market should be deregulated. It may be noted that though it is true that oil subsidies were rising, the excise revenues from oil was substantially larger than the subsidies. Also, the surpluses of petroleum mining and refining companies were substantial enough for cross subsidisation of the loss-making retail oil companies. But the entry of private players (like Reliance and Essar) into the retail trade made cross-subsidisation untenable, and demands were raised by them for a level playing field. This was the broad backdrop to deregulation of the oil sector.

Misnomer of market prices

The Administered Price Mechanism for petroleum was dismantled, invoking the mantra of “let the market decide the prices”. But the question here is: have markets been allowed to decide?

When OPEC prices showed a downward trend, the Centre chose to increase the excise duty on petrol and diesel. The hike in excise duty was 380 per cent for diesel and 120 per cent for petrol between 2014 and 2017, during which period the rates rose from ₹3.56 per litre to ₹ 17.33 for diesel and for petrol from ₹ 9.48 per litre to ₹ 21.48 per litre ( Business Line September 9, 2017).

The C&AG Report No 3 on Indirect Taxes of the Union, has observed that the huge increase in central excise collection from petroleum products during the financial year 2015-16 was due to a sharp increase in per unit tax on petrol and diesel. The excise duty revenue of the central government from petroleum products which was ₹88600 crore in 2013-14 peaked to ₹ 2,53,254 crore in 2016-17. Never has indirect tax on any commodity witnessed such a sharp escalation as on petroleum products as during the first two years of the BJP government.

Current situation

From late 2016, the international prices crude oil began to rise and it was expected that the Centre would at least reduce its excise duties so that the retail prices will not be affected. In a most callous fashion the Centre refused to reduce the excise duties, and prodded oil companies to raise their retail selling prices.

The result is the retail selling price of petrol and diesel has increased to an unacceptable level of ₹ 81.28 and ₹ 73.54 per litre respectively (Delhi prices) from ₹ 70.49 and ₹56.81 per litre a year back. The Centre did not want to give up any of its additional revenue mobilised from petroleum products; it fears an adverse impact on fiscal deficit at a time when rupee under severe pressure. However, rising fuel prices are stoking an inflationary fire, accentuating the crisis in the unorganised sector and imposing an unbearable burden on the people. Petroleum prices have become a key political issue.

Untenable demand

Therefore, apologists of Central policies have been trying to put the blame on the States. It has been argued that States are benefiting from petroleum price escalation through higher devolution -- after the Fourteenth Finance Commission award -- in the share of central excise duty and the cascading impact on ad valorem VAT rates; hence, it is assumed that they can cut their own levies.

It is true that VAT rates are relatively high but they are historically determined for the present state governments. There has been hardly any increase in State VAT rates in recent years. If the Centre rolls back its excise duty hike, States' revenues would also decline and no State government will ever increase the VAT rate to neutralise the fall in revenue. It may be noted that most States have already reduced VAT rates to moderate the price escalation in petroleum products caused by the Centre's policies.

The ball is in the Centre's court. It must roll back the excise duty hikes. As for the argument that the States benefit from higher devolution from central excise duties (and therefore have leeway to cut their own rates), it simply does not apply with respect to petroleum products.

It can be seen (from the table) that 62.97 per cent and 39.58 per cent of central excise duty with respect to petrol and diesel, respectively, is outside the divisible pool of taxes shareable with the States, as only basic excise duty is shareable with the States. In the Indian context, substantial social sector spending obligations are with the States. Keeping a substantial portion outside the shareable pool, contradicts the argument of the Centre that the higher taxes are for Swachh Bharat and social sector schemes. There is no established connection between higher duties on petroleum products and social sector spending.

A demand has also been made that petroleum products be included in the GST. There is merit in the argument. But before petroleum products are to be subsumed in GST, given fragile State finances, a compensation package has to be finalised as per the GST compensation law. This will be a time consuming process, as the present compensation cess would be inadequate. The solution is for the Centre to immediately roll back its excise duty spikes.

The author is the Finance Minister of Government of Kerala